QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended
June 30, 2017

or

¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 000-51595

________________________

Web.com Group, Inc.

(Exact name of registrant as specified in its charter)

________________________

Delaware

94-3327894

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

12808 Gran Bay Parkway, West, Jacksonville, FL

32258

(Address of principal executive offices)

(Zip Code)

(904) 680-6600

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

________________________

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
ý
Yes
¨
No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
ý
Yes
¨
No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer
x

Accelerated filer
¨

Non-accelerated filer
¨

Smaller reporting company
¨

(Do not check if a smaller reporting company)

Emerging growth company
¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13 (a) of the Exchange Act.
¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
¨
Yes
ý
No

Common Stock, par value $0.001 per share, outstanding as of
July 31, 2017
: 51,565,886

Certain reclassifications have been made to the previously presented financial statements to conform with the current presentation

3

Web.com Group, Inc.

Consolidated Statements of Comprehensive Income

(in thousands, except per share amounts)

(unaudited)

(continued)

Three months ended June 30,

Six months ended June 30,

2017

2016

2017

2016

Basic earnings (loss) per share:

Net income (loss) per basic common share

$

0.16

$

(0.03

)

$

0.30

$

(0.03

)

Diluted earnings (loss) per share:

Net income (loss) per diluted common share

$

0.16

$

(0.03

)

$

0.29

$

(0.03

)

Basic weighted average common shares outstanding

49,488

49,293

49,283

49,334

Diluted weighted average common shares outstanding

51,186

49,293

51,067

49,334

See accompanying notes to consolidated financial statements

4

Web.com Group, Inc.

Consolidated Balance Sheets

(in thousands, except share amounts)

June 30,
2017

December 31,
2016

(unaudited)

Assets

Current assets:

Cash and cash equivalents

$

33,449

$

20,447

Accounts receivable, net of allowance of $1,631 and $1,695, respectively

20,285

20,567

Prepaid expenses

13,538

12,311

Deferred expenses

63,178

60,217

Other current assets

1,868

1,872

Total current assets

132,318

115,414

Property and equipment, net

55,248

53,132

Deferred expenses

48,417

49,127

Goodwill

881,590

871,751

Intangible assets, net

392,359

413,127

Other assets

21,011

11,282

Total assets

$

1,530,943

$

1,513,833

Liabilities and stockholders' equity

Current liabilities:

Accounts payable

$

20,243

$

19,619

Accrued expenses

14,001

14,475

Accrued compensation and benefits

15,074

18,307

Deferred revenue

240,675

230,206

Current portion of debt

4,765

16,847

Deferred consideration

22,902

20,244

Other liabilities

4,236

5,034

Total current liabilities

321,896

324,732

Deferred revenue

193,661

195,859

Long-term debt

640,202

647,294

Deferred tax liabilities

64,567

80,135

Other long-term liabilities

17,625

30,361

Total liabilities

1,237,951

1,278,381

Stockholders' equity:

Common stock, $0.001 par value per share: 150,000,000 shares authorized, 51,435,214 and 50,278,137 shares issued and outstanding at June 30, 2017 and December 31, 2016, respectively

51

50

Additional paid-in capital

579,083

578,486

Treasury stock at cost, 1,723,706 shares as of June 30, 2017 and 3,146,012 shares as of December 31, 2016

(48,035

)

(62,430

)

Accumulated other comprehensive loss

(4,044

)

(4,020

)

Accumulated deficit

(234,063

)

(276,634

)

Total stockholders' equity

292,992

235,452

Total liabilities and stockholders' equity

$

1,530,943

$

1,513,833

See accompanying notes to consolidated financial statements

5

Web.com Group, Inc.

Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

Six months ended June 30,

2017

2016

Cash flows from operating activities

Net income (loss)

$

14,562

$

(1,268

)

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization

35,834

38,186

Stock based compensation

11,659

10,200

Deferred income taxes

11,176

599

Amortization of debt issuance costs and other

7,399

6,685

Asset impairment

143

—

Changes in operating assets and liabilities:

Accounts receivable, net

986

(1,758

)

Prepaid expenses and other assets

(5,216

)

(10,935

)

Deferred expenses

(1,535

)

(2,586

)

Accounts payable

(169

)

(1,585

)

Accrued expenses and other liabilities

347

(519

)

Accrued compensation and benefits

(3,672

)

(7,375

)

Deferred revenue

5,452

15,644

Net cash provided by operating activities

76,966

45,288

Cash flows from investing activities

Business acquisitions

(8,587

)

(303,262

)

Capital expenditures

(10,573

)

(8,306

)

Other

—

(1,300

)

Net cash (used in) investing activities

(19,160

)

(312,868

)

Cash flows from financing activities

Stock issuance costs

(4

)

(6

)

Common stock repurchased

(3,559

)

(3,233

)

Payments of long-term debt

(27,954

)

(4,937

)

Payments on revolving credit facility

(56,313

)

(27,563

)

Proceeds from exercise of stock options

8,979

1,205

Deferred consideration payment

(18,933

)

—

Proceeds from borrowings on long-term debt

50,000

200,000

Proceeds from borrowings on revolving credit facility

7,000

115,000

Debt issuance costs

(1,927

)

(5,700

)

Common stock purchases under stock repurchase plan

(2,081

)

(16,909

)

Net cash (used in) provided by financing activities

(44,792

)

257,857

Effect of exchange rate changes on cash

(12

)

(33

)

Net increase (decrease) in cash and cash equivalents

13,002

(9,756

)

Cash and cash equivalents, beginning of period

20,447

18,706

Cash and cash equivalents, end of period

$

33,449

$

8,950

Supplemental cash flow information

Interest paid

$

8,812

$

6,851

Income taxes paid

$

1,573

$

2,046

See accompanying notes to consolidated financial statements

6

Web.com Group, Inc.

Notes to Consolidated Financial Statements

(unaudited)

1. The Company and Summary of Significant Accounting Policies

Description of Company

Web.com Group, Inc. ("Web.com" or "the Company") provides a full range of Internet services to small businesses to help them compete and succeed online. Web.com meets the needs of small businesses anywhere along their lifecycle with affordable, subscription-based solutions including domains, hosting, website design and management, search engine optimization, online marketing campaigns, local sales leads, social media, mobile products and eCommerce solutions. For more information about the Company, please visit
http://www.web.com.
The information obtained on or accessible through the Company's website is not incorporated into this Quarterly Report on Form 10-Q and you may not consider it a part of this Quarterly Report on Form 10-Q.

The Company has reviewed the criteria of Accounting Standards Codification ("ASC") 280-10, Segment Reporting, and has determined that the Company is comprised of only
one
segment, web services and products.

On January 31, 2017, the Company acquired
100%
of the equity interests of Dattatec.com SRL ("DonWeb.com or DonWeb"), a hosting and domain registration company catering to the Spanish-speaking market, located in Rosario, Argentina. See Note 2,
Business Combinations
, for additional information surrounding the acquisition.

On March 9, 2016, the Company completed the acquisition of
100%
of the outstanding shares of Yodle, Inc., a Delaware corporation, ("Yodle"), for approximately
$341.3 million
, which included
$40.9 million
of deferred consideration. Yodle is a leading provider of cloud based local marketing solutions for small businesses with approximately
1,400
employees and
53,000
subscribers as of the closing of the acquisition. See Note 2,
Business Combinations
, for additional information surrounding the acquisition.

Basis of Presentation

The accompanying consolidated balance sheet as of
June 30, 2017
, the consolidated statements of comprehensive income for the three and
six months ended June 30, 2017
and
2016
, the consolidated statements of cash flows for the
six months ended June 30, 2017
and
2016
, and the related notes to the consolidated financial statements are unaudited.

The unaudited consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements for the year ended
December 31, 2016
, except that certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or excluded as permitted.

In the opinion of management, the unaudited consolidated financial statements include all adjustments of a normal recurring nature necessary for the fair presentation of the Company’s financial position as of
June 30, 2017
, the Company’s results of operations for the three and
six months ended June 30, 2017
and
2016
, and the cash flows for the
six months ended June 30, 2017
and
2016
. The results of operations for the three and
six months ended June 30, 2017
, are not necessarily indicative of the results to be expected for the year ending
December 31, 2017
. The Company's financial position as of June 30, 2017 includes the assets and liabilities of Donweb.com and the results of operations and cash flows include Donweb.com from the acquisition date through June 30, 2017. The results of operations and cash flows for the
six months ended June 30, 2016
include Yodle from the acquisition date through the respective period end date.

Pursuant to the rules and regulations of the SEC, certain information and disclosures normally included in the notes to the annual financial statements prepared in accordance with U.S. generally accepted accounting principles ("GAAP") have been omitted from these interim financial statements. The Company suggests that these financial statements be read in conjunction with the audited financial statements and the notes included in the Company's most recent annual report on Form 10-K filed with the SEC on February 28, 2017, and any subsequently filed current reports on Form 8-K.

7

Reclassification of Expenses and Correction of Immaterial Accounting Error

Reclassification of Expenses

In an effort to report operating expenses in a manner more in line with functional areas and to simplify the related accounting, the Company has changed its classification of certain information technology related operating expenses from general and administrative expenses to technology and development expenses. This reclassification was applied retrospectively to all periods presented. The Company also reclassified customer support costs previously included in cost of revenue to sales and marketing on a prospective basis.

Correction of Immaterial Accounting Error

The Company's policy is to report costs associated with the data centers and systems infrastructure that support the products developed by its technology personnel ("infrastructure costs") in technology and development expense. The Company identified certain infrastructure costs that had been recorded to cost of revenue and elected to correct the historical presentation of these expenses. To correct this immaterial error, the costs have been recorded in technology and development expenses for all periods presented.

Adjustments to Presentation

The above mentioned changes had no cumulative effect on the presentation of the consolidated statements of comprehensive income, consolidated balance sheet, or consolidated statements of cash flows. The effects of the aforementioned error correction and accounting classification change to the
June 30, 2016
unaudited consolidated statements of comprehensive income are as follows (in thousands)

Three months ended June 30, 2016

Six months ended June 30, 2016

As Previously Reported

Change in Accounting Classification

Effect of Error Correction

As Adjusted

As Previously Reported

Change in Accounting Classification

Effect of Error Correction

As Adjusted

Cost of revenue

$

59,743

—

(985

)

$

58,758

$

110,826

—

(2,017

)

$

108,809

Sales and marketing

$

58,448

—

1,687

$

60,135

$

100,459

—

2,103

$

102,562

Technology and development

$

15,533

2,337

1,862

$

19,732

$

24,611

4,636

3,111

$

32,358

General and administrative

$

23,465

(2,337

)

(2,564

)

$

18,564

$

43,129

(4,636

)

(3,197

)

$

35,296

Use of Estimates

The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

Sources of Revenue

Subscription Revenue

The Company currently derives a substantial majority of its revenue from fees associated with our subscription services, which generally include web services, online marketing, eCommerce, and domain name registration offerings. We bill a majority of our customers in advance and recognize revenue on a daily basis over the life of the contract. Generally, revenue is recognized net of sales tax.

8

Professional Services and Other Revenue

The Company also generates professional services revenue from custom website design, eCommerce store design and support services. Custom website design and eCommerce store design work is typically billed on a fixed-price basis and over very short periods. Generally, revenue is recognized net of sales tax when the service has been completed.

Cost of Revenue and Operating Expenses

Cost of Revenue

Cost of revenue consists of expenses related to compensation of our web page development staff, domain name registration costs, directory listing fees, eCommerce store design, online marketing costs for services provided, billing costs, hosting expenses, and allocated occupancy overhead costs. The Company allocates occupancy overhead costs such as rent and utilities to all departments based on headcount. Accordingly, general overhead expenses are reflected in each cost of revenue and operating expense category.

Sales and Marketing Expense

The Company's direct marketing expenses include the costs associated with the online marketing channels used to promote our services and acquire customers. These channels include search marketing, affiliate marketing and partnerships. Sales and marketing costs consist primarily of compensation and related expenses for our sales and marketing staff as well as our customer support staff and allocated occupancy overhead costs. Sales and marketing expenses also include marketing programs, such as advertising, corporate sponsorships and other corporate events and communications.

Technology and development

Technology and development represents costs associated with creation, development and distribution of our products and websites. Technology and development expenses primarily consist of headcount-related costs associated with the design, development, deployment, testing, operation, enhancement of our products and costs associated with the data centers and all systems infrastructure costs supporting those products as well as all administrative platforms and allocated occupancy overhead costs.

General and Administrative Expense

General and administrative expenses consist of compensation and related expenses for executive, finance, and administration, as well as professional fees, corporate development costs, other corporate expenses, and allocated occupancy overhead costs.

Depreciation and Amortization Expense

Depreciation and amortization expenses relate primarily to our intangible assets recorded due to the acquisitions we have completed, as well as depreciation expense from computer and other equipment, internally developed software, furniture and fixtures, and building and improvement expenditures.

Foreign Currency Translation

The functional currency of the Company’s Argentinian Donweb operations and our United Kingdom-based operations is the Argentina Peso and British Pound, respectively. The Company translates the financial statements of these subsidiaries to U.S. dollars using month-end rates of exchange for assets and liabilities, historical rates of exchange for equity and average rates of exchange for revenues, costs, and expenses. Translation gains and losses are recorded in accumulated other comprehensive income (loss) as a component of stockholders’ equity.

In addition, the Company’s foreign operations include a customer service center and an outbound sales center in Canada and a technology center in Buenos Aires, Argentina. The Company records foreign currency transaction gains and losses, and remeasurement of local currencies of these foreign subsidiaries where the functional currency is different from the local foreign currency in the consolidated statements of income (loss).

New Accounting Standards

Recently Adopted Accounting Standards

In March 2016, the FASB issued Accounting Standards Update ("ASU") 2016-09, Compensation-Stock Compensation: Improvements to Employee Share-Based Payment Accounting and is effective for fiscal years beginning after December 15, 2016. The standard is intended to simplify several areas of accounting for share-based compensation arrangements, including

9

the income tax impact, classification on the statement of cash flows, statutory withholding requirements and forfeitures. The Company adopted ASU 2016-09 in the first quarter of 2017 and recorded excess tax benefits (ETBs) as income tax expense or benefit in the income statement prospectively as of the beginning of the year of adoption and the Company continued to record shortfalls as a component of income tax expense consistent with historical practices. For interim reporting purposes, the Company reports ETBs and shortfalls as discrete items in the period in which they occur. For the three and six months ended June 30, 2017, the Company recognized a tax benefit related to the adoption of
$0.3 million
and
$0.9 million
, respectively.

In addition, the guidance eliminates the requirement that ETBs be realized before companies can recognize them. The Company applied this part of the guidance using a modified retrospective transition method and record a cumulative-effect adjustment for previously unrecognized ETBs in opening retained earnings on January 1, 2017 upon adoption. The cumulative-effect adjustment for federal and state tax purposes is
$27.0 million
and
$2.7 million
, respectively. A valuation allowance was recorded on
$1.7 million
of these deferred tax assets for a portion of the state adjustment to reflect the amount realized on a "more likely than not" basis.

Further, the Company presents ETBs and excess tax deficiencies as an operating activity on the statement of cash flows starting on January 1, 2017. The Company has prospectively adopted this change. The Company continues to record its stock compensation expense based on an estimate of the awards that are expected to vest, rather than recording forfeitures when they occur.

Accounting Standards Issued Not Yet Adopted

In May 2014, the FASB and International Accounting Standards Board ("IASB") issued ASU 2014-09 Revenue from Contracts with Customers (Topic 606), a converged standard on revenue recognition which supersedes previous revenue recognition guidance. Some of the main areas of transition to the new standard include, among others, transfer of control (revenue is recognized when a customer obtains control of a good or service), allocation of transaction price is based on relative standalone selling price (entities that sell multiple goods or services in a single arrangement must allocate the consideration to each of those goods or services), contract costs (entities sometimes incur costs, such as sales commissions or mobilization activities, to obtain or fulfill a contract), and disclosures (extensive disclosures are required to provide greater insight into both revenue that has been recognized, and revenue that is expected to be recognized in the future from existing contracts). In August 2015, the FASB issued ASU 2015-14 Revenue from Contracts with Customers (Topic 606), Deferral of the Effective Date, which defers the effective date of the new standard by one year, resulting in the new standard being effective for fiscal years, and interim periods within those years, beginning after December 15, 2017 with early adoption as of the original effective date permitted. In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers: Principal versus Agent Considerations (Reporting Revenue Gross versus Net) and in April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing. Further in May 2016, the FASB issued ASU 2016-12, Revenue from Contracts with Customers: Narrow-Scope Improvements and Practical Expedients. These standards clarify the guidance in ASU 2014-09 and have the same effective date as the original standard. The Company will apply the standard using a modified retrospective approach with the cumulative effect of initially applying the standard recognized at the date of initial application inclusive of certain additional disclosures, as permitted under Topic 606. The Company is in the process of reviewing its customer contracts and designing necessary systematic changes in order to ascertain the impact of the new standard on its consolidated financial statements.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments-Overall: Recognition and Measurement of Financial Assets and Financial Liabilities (Subtopic 825-10), which addresses certain aspects of the recognition, measurement, presentation and disclosure of financial instruments. The amendment will be effective for the Company beginning January 1, 2018 and the adoption of this standard is not expected to have a material impact on its consolidated financial statements or disclosures.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which requires lessees to recognize on the balance sheet a right-of-use asset, representing their right to use the underlying asset for the lease term, and a lease liability for all leases with terms greater than 12 months. The guidance also requires qualitative and quantitative disclosures designed to assess the amount, timing and uncertainty of cash flows arising from leases. The standard requires the use of a modified retrospective transition approach, which includes a number of optional practical expedients that entities may elect to apply. ASU 2016-02 is effective for the Company beginning January 1, 2019 and the Company is currently evaluating the impact that ASU 2016-02 will have on its consolidated financial statements.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, addressing eight specific cash flow issues in an effort to reduce diversity in practice. The amended guidance is effective for fiscal years beginning after December 31, 2017, and for interim periods within those years. Early adoption is permitted. The Company is currently evaluating the impact that ASU 2016-15 will have on its consolidated financial statements.

10

In October 2016, the FASB issued ASU 2016-16, which requires that entities recognize the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs. The standard will be effective for the Company on January 1, 2018. The adoption is not expected to have a material impact on the consolidated financial statements.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flow (Topic 230): Restricted Cash, which states that amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The amended guidance is effective for the fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. Upon adoption, the Company will present restricted cash, which is currently included in other assets, with the cash and cash equivalents balances in the cash flow statement.

In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. The new guidance clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The new guidance is effective for public business entities for annual periods beginning after December 15, 2017, including interim periods within those periods. The adoption of this standard is not expected to have a material impact on our consolidated financial statements or disclosures.

In January 2017, the FASB issued ASU 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The new guidance requires only a one-step quantitative impairment test, whereby a goodwill impairment loss will be measured as the excess of a reporting unit’s carrying amount over its fair value (not to exceed the total goodwill allocated to that reporting unit). It eliminates Step 2 of the current two-step goodwill impairment test, under which a goodwill impairment loss is measured by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. For public companies, the amended guidance is effective for the annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. The adoption of this standard is not expected to have a material impact on its consolidated financial statements or disclosures.

In May 2017, the FASB issued ASU 2017-09, Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting. The new guidance amends the scope of modification accounting for share-based payment arrangements and provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting under ASC 718. For all entities, the amended guidance is effective for annual periods beginning after December 15, 2017, including interim periods within those periods. Early adoption is permitted. The adoption of this standard is not expected to have a material impact on its consolidated financial statements or disclosures.

2. Business Combinations

Acquisition of DonWeb.com

On January 31, 2017, the Company acquired Donweb.com, a hosting and domain registration company catering to the Spanish-speaking market, located in Rosario, Argentina. The Company paid approximately
$8.6 million
at closing. The Company may pay the seller additional consideration of up to
$2.0 million
on January 31, 2021, present valued to
$1.7 million
as of the acquisition date, for total consideration of
$10.3 million
. In addition, the agreement includes a
four
-year earnout provision that entitles the seller up to
$3.0 million
of consideration contingent upon the post-acquisition business performance and employment. Earnout amounts are recorded as compensation expense. Transaction costs associated with the acquisition were not significant and the results of operations from DonWeb during the three and six months ended June 30, 2017 were not material for disclosure herein.

The Company has accounted for the acquisition using the acquisition method as required by ASC 805, Business Combinations. As such, preliminary fair values have been assigned to the assets acquired and liabilities assumed and the excess of the total purchase price over the fair value of the net assets acquired is recorded as goodwill. The Company, with the assistance of independent valuation professionals, has also performed preliminary estimates of the fair value of certain intangible assets. The goodwill recorded from this acquisition represents business benefits the Company anticipates realizing from acquiring an entity in the Spanish-speaking market, and is not expected to be deductible for income tax purposes. In connection with the acquisition, the Company recorded approximately
$4.0 million
of liabilities arising from pre-acquisition matters that are more likely than not to be sustained upon examination, inclusive of interest and penalties for which the Company is indemnified. The following table summarizes the Company's preliminary purchase price allocation based on the fair values of the assets acquired and the liabilities assumed.

11

As of June 30, 2017

Tangible current assets

$

1,370

Property plant and equipment

2,331

Intangible assets

4,140

Other non current assets

2,849

Goodwill

9,914

Current liabilities

(1,355

)

Deferred revenue

(2,860

)

Other long term liabilities

(6,041

)

Purchase price consideration

$

10,348

The Company is still reviewing information surrounding intangible assets, certain assets and liabilities, income taxes and deferred revenue. These items may result in changes to the Company's preliminary purchase price allocation.

Acquisition of Yodle

On March 9, 2016, the Company executed an Agreement and Plan of Merger (the "Merger Agreement) with Yodle, Inc., a Delaware corporation ("Yodle"), and Shareholder Representative Services, LLC, a Colorado limited liability company. The Company acquired
100%
of the outstanding shares of Yodle, Inc. and paid approximately
$300.3 million
adjusted for, among other things, Yodle's cash and outstanding debt and transaction related expenses. The Company paid an additional
$18.9 million
on March 9, 2017 and will pay
$22.0 million
on the second anniversary date of the closing, subject to adjustments as described in the Merger Agreement. Finally, the Company converted out of the money stock options held by employees of Yodle to Web.com options, which resulted in additional consideration of
$2.3 million
, for total consideration of
$341.3 million
. In addition to the consideration, the Company incurred approximately
$3.9 million
of acquisition-related transaction expenses which are reflected in the General and Administrative line item of the Consolidated Statements of Comprehensive Income. The Company has accounted for the acquisition of Yodle using the acquisition method as required ASC 805.

Pro Forma Condensed Consolidated Results of Operations

The Company has prepared the unaudited condensed pro forma financial information to reflect the consolidated results of operations as though the Yodle acquisition had occurred on January 1, 2016 for the six months ended June 30, 2016. The Company has made adjustments to the historical Web.com and Yodle financial statements that are directly attributable to the acquisition, factually supportable and expected to have a continuing impact on the combined results. The pro forma presentation does not include any impact of transaction costs or expected synergies. The pro forma results are not necessarily indicative of our results of operations had the Company owned Yodle for the entire periods presented.

The Company has adjusted the results of operations to reflect the impact of amortizing into revenue, deferred revenue that was recorded at fair value. In addition, interest expense and amortization of intangible assets were adjusted to reflect the cost of the March 9, 2016 debt issued to finance the acquisition and the fair value of the intangible assets on the acquisition date, respectively.

On May 31, 2016, the Company completed the acquisition of substantially all of the assets and certain liabilities of Brokerage Leader Inc. ("TORCHx"), a Florida corporation, which primarily consisted of customer relationships and developed technology intangible assets. TORCHx is a real estate platform built for agents and brokerages that features search engine optimization (SEO) and responsive design, customer relationship management (CRM) and other tools to help run successful online marketing campaigns. The Company paid
$4.4 million
for this business during the second quarter of 2016, of which
$3.0 million
was paid at closing and the remaining
$1.4 million
is payable on November 30, 2017.

The Company has accounted for the acquisition of TORCHx using the acquisition method as required in ASC 805. As such, fair values have been assigned to the assets acquired and liabilities assumed and the excess of the total purchase price over the fair value of the net assets acquired is recorded as goodwill. The Company estimated the fair value of certain intangible assets. The goodwill recorded from this acquisition represents business benefits the Company anticipates realizing from optimizing resources and cross-sale opportunities. The goodwill from the acquisition is deductible for tax purposes.

3. Net Income Per Common Share

Basic net income per common share is calculated using net income and the weighted-average number of shares outstanding during the reporting period. Diluted net income per common share includes the effect from the potential issuance of common stock, such as common stock issued pursuant to the exercise of stock options or vesting of restricted shares.

The Company issues equity awards with performance, service and market conditions. These awards are included in basic shares outstanding once all criteria have been met and the shares have vested. Prior to the end of the vesting period, the number of contingently issuable shares included in diluted EPS is based on the number of shares, if any, that would be issuable under the terms of the arrangement if the end of the reporting period were the end of the contingency period, using the treasury stock method and assuming the result would be dilutive. See Note 10,
Stock-Based Compensation and Stockholders' Equity
, for additional information on this award.

During the
three months ended June 30, 2017
and
2016
,
2.9 million
and
9.2 million
share-based awards, respectively, have been excluded from the calculation of diluted common shares because including those securities would have been anti-dilutive.

During the
six months ended June 30, 2017
and
2016
,
2.8 million
and
9.2 million
share-based awards, respectively, have been excluded from the calculation of diluted common shares because including those securities would have been anti-dilutive.

The Company's potentially dilutive shares also include incremental shares issuable upon the conversion of the Company's Senior Convertible Notes due August 15, 2018 ("2018 Notes"). See Note 6,
Long-term Debt
, for additional information regarding the 2018 Notes. Upon conversion or maturity of the 2018 Notes, the Company may settle the notes with either cash, shares of its common stock or a combination of cash and shares of its common stock, at its election. The Company has adopted a current policy to settle the principal amount in cash and any excess conversion value in shares of our common stock. Because the principal amount of the 2018 Notes will be settled in cash upon conversion, only the conversion spread relating to the 2018 Notes is included in our calculation of diluted net income per common share. When the market price of the Company's stock exceeds the conversion price, as applicable, it will include, in the diluted net income per common share calculation, the effect of the additional shares that may be issued upon conversion using the treasury stock method. There were no incremental common shares from the 2018 Notes that were included in the calculation of diluted shares because the Company's average price of its common stock did not exceed the conversion price during the
three and six
months ended
June 30, 2017
and
2016
.

13

The following table sets forth the computation of basic and diluted net income per common share (in thousands, except per share amounts):

Three months ended June 30,

Six months ended June 30,

2017

2016

2017

2016

Net income (loss)

$

8,046

$

(1,606

)

$

14,562

$

(1,268

)

Basic weighted average common shares outstanding

49,488

49,293

49,283

49,334

Dilutive effect of stock options

1,352

—

1,322

—

Dilutive effect of restricted shares

346

—

456

—

Dilutive effect of performance shares

—

—

6

—

Diluted weighted average common shares outstanding

51,186

49,293

51,067

49,334

Net income (loss) per basic common share

$

0.16

$

(0.03

)

0.30

(0.03

)

Net income (loss) per diluted common share

$

0.16

$

(0.03

)

$

0.29

$

(0.03

)

4. Goodwill and Intangible Assets

In accordance with ASC 350, the Company reviews goodwill and other indefinite-lived intangible asset balances for impairment on an annual basis and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of goodwill or indefinite-lived intangible assets below its carrying amount. As of
December 31, 2016
, the Company completed its annual impairment test of goodwill and other indefinite-lived intangible assets and determined that there was no impairment. There were no indicators of impairment during the
six months ended June 30, 2017
.

The following table summarizes changes in the Company’s goodwill balances as required by ASC 350-20 for the
six months ended June 30, 2017
and the year ended
December 31, 2016
, respectively (in thousands):

June 30,
2017

December 31,
2016

Goodwill balance at beginning of period

$

974,045

$

741,439

Accumulated impaired goodwill at beginning of period

(102,294

)

(102,294

)

Goodwill balance at beginning of period, net

871,751

639,145

Goodwill acquired during the period- DonWeb-
Note 2, Business Combinations

9,914

—

Goodwill acquired during the period- Yodle-
Note 2, Business Combinations

—

231,612

Goodwill acquired during the period- TORCHx-
Note 2, Business Combinations

—

2,266

Foreign currency translation adjustments (1)

(75

)

(1,272

)

Goodwill balance at end of period, net *

$

881,590

$

871,751

* Gross goodwill balances were
$983.9 million
as of
June 30, 2017
and
$974.0 million
as of
December 31, 2016
. These include accumulated impairment losses of
$102.3 million
.

(1) The foreign currency translation adjustments are from translating the goodwill acquired from the July 2014 Scoot and January 2017 Donweb acquisitions at the current balance sheet date.

14

The Company’s intangible assets are summarized as follows (in thousands):

June 30, 2017

Gross Carrying Amount

Accumulated Amortization

Net

Weighted-average Remaining Amortization Period in Years

Indefinite-lived intangible assets:

Domain/Trade names

$

161,902

$

—

$

161,902

Definite-lived intangible assets:

Customer relationships

325,761

(171,573

)

154,188

6.1

Developed technology

280,548

(205,310

)

75,238

4.4

Other

8,405

(7,374

)

1,031

0.8

Total *

$

776,616

$

(384,257

)

$

392,359

* Cumulative foreign currency translation adjustments, reflecting the movement in currencies, increased total intangible assets by approximately
$0.1 million
as of
June 30, 2017
.

December 31, 2016

Gross Carrying Amount

Accumulated Amortization

Net

Weighted-average Remaining Amortization Period in Years

Indefinite-lived intangible assets:

Domain/Trade names

$

159,805

$

—

$

159,805

Definite-lived intangible assets:

Customer relationships

324,327

(157,998

)

166,329

6.5

Developed technology

280,455

(195,695

)

84,760

4.8

Other

7,394

(5,161

)

2,233

1.4

Total *

$

771,981

$

(358,854

)

$

413,127

* Cumulative foreign currency translation adjustments, reflecting the movement in currencies, decreased total intangible assets by approximately
$1.0 million
as of
December 31, 2016
.

The weighted-average amortization period for the amortizable intangible assets remaining as of
June 30, 2017
is approximately
5.5
years. Total amortization expense was
$12.1 million
and
$16.8 million
for the
three months ended June 30, 2017
and
2016
, respectively. Total amortization expense was
$25.0 million
and
$28.1 million
for the
six months ended June 30, 2017
and
2016
, respectively.

As of
June 30, 2017
, the amortization expense for the remainder of the year ended
December 31, 2017
, and the next five years and thereafter is as follows (in thousands):

2017 (remainder of year)

$

23,955

2018

44,824

2019

41,097

2020

38,874

2021

38,105

Thereafter

43,602

Total

$

230,457

15

5. Related Party Transactions

Effective February 6, 2015, the Company elected Mr. John A. Giuliani to serve on its Board of Directors. Mr. Giuliani serves as President, Chief Executive Officer and Director of Conversant, a subsidiary of Alliance Data Systems Corporation, a personalized digital marketing platform. The Company incurred
$0.2 million
of expense related to services provided by Conversant during each of the three months ended
June 30, 2017
and
2016
, respectively. During each of the
six months ended June 30, 2017
and
2016
, the Company incurred
$0.4 million
of expense related to services provided by Conversant.

6. Long-Term Debt

1% Senior Convertible Notes due August 15, 2018

In August 2013, the Company issued
$258.8 million
aggregate principal amount of
1.00%
Senior Convertible Notes due
August 15, 2018
(the "2018 Notes"). The 2018 Notes bear interest at a rate of
1.00%
per year, payable semiannually in arrears, on February 15 and August 15 of each year, beginning on February 15, 2014. The conversion price for the 2018 Notes is equivalent to an initial effective conversion price of approximately
$35.00
per share of common stock. Proceeds, net of original issuance discounts and debt issuance costs, of
$252.3 million
were received from the 2018 Notes. The net proceeds were used to pay down
$208.0 million
of the First Lien Term Loan and
$43.0 million
of the Revolving Credit Facility.

The Company may not redeem the 2018 Notes prior to
August 20, 2016
. On or after August 20, 2016, the Company may redeem for cash any or all of the 2018 Notes, at its option, if the last reported sale price of its common stock exceeds
130%
of the applicable conversion price on each applicable trading day as defined by the indenture. The redemption price will equal
100%
of the principal amount of the 2018 Notes to be redeemed, plus accrued and unpaid interest to, but not including, the redemption date. Holders of the 2018 Notes may also convert their notes at any time prior to
May 15, 2018
if the sale price of the Company's common stock exceeds
130%
of the applicable conversion price on each applicable trading day as defined by the indenture.

In addition, holders may also convert their 2018 Notes any time prior to
May 15, 2018
, (i) if during the
five
business days after any
five
consecutive trading day period in which the trading price of the 2018 Notes was less than
98%
of the product of the last reported sale price of the Company's common stock and the conversion rate, (ii) if the Company calls the 2018 Notes for redemption; or (iii) upon the occurrence of specified corporate events.

The 2018 Notes are senior unsecured obligations and will be effectively junior to any of the Company's existing and future secured indebtedness.

The Company determined that the embedded conversion option in the 2018 Notes is not required to be separately accounted for as a derivative under ASC 815,
Derivatives and Hedging
. The 2018 Notes are within the scope of ASC 470, Topic 20,
Debt with Conversion and Other Options,
which requires the Company to separate a liability component and an equity component from the proceeds received. The carrying amount of the liability component at the time of the transaction of
$204.4 million
was calculated by measuring the fair value of a similar debt instrument that does not have an associated equity component. The fair value of the liability component was subtracted from the initial proceeds and the remaining amount of
$47.8 million
was recorded as the equity component. The excess of the principal amount of the liability component over its carrying amount will be amortized to interest expense over the expected life of
5 years
using the effective interest method.

Upon conversion or maturity of the 2018 Notes, the Company may settle the notes with either cash, shares of its common stock or a combination of cash and shares of its common stock, at its election. The Company has adopted a current policy to settle the
$258.8 million
of principal amount in cash and any excess conversion value in shares of its common stock. Because the principal amount of the 2018 Notes will be settled in cash upon conversion, only the conversion spread relating to the 2018 Notes may be included in the Company's calculation of diluted net income per common share. When the market price of the Company's stock exceeds the conversion price, it will include, in the diluted net income per common share calculation, the effect of the additional shares that may be issued upon conversion using the treasury stock method. As such, the 2018 Notes have no impact on diluted net income per common share until the price of the Company's common stock exceeds the conversion price (approximately
$35.00
per common share) of the 2018 Notes.

As of
June 30, 2017
and
December 31, 2016
, the carrying value of the debt and equity component was
$245.0 million
and
$47.8 million
and
$239.2 million
and
$47.8 million
, respectively. The unamortized debt discount of
$13.7 million
as of
June 30, 2017
will be amortized over the remaining life of
1.1 years
using the effective interest method.

16

Credit Agreement

On February 11, 2016, the Company entered into an amendment (the "Amendment") to that certain Credit Agreement, dated as of September 9, 2014 (the "Existing Credit Agreement" and as amended by the Amendment, the "Amended Credit Agreement"), by and among the Company, the several lenders from time to time parties thereto, and JPMorgan Chase Bank, N.A., as administrative agent. On March 9, 2016 (the "Closing Date"), the amended Credit Agreement became effective following the completion of the acquisition of Yodle Inc. (the "Acquisition"). On May 18, 2017, the Company entered into a second amendment to the Credit Agreement ("Second Amendment").

The Amended Credit Agreement provided (i)
$390.0 million
of
five
-year secured term loans, replacing and refinancing
$190.0 million
of secured term loans outstanding under the Existing Credit Agreement and providing for an additional
$200.0 million
of secured term loans (the "Term Loan") and (ii) a five-year secured revolving credit facility that provides up to
$150.0 million
of revolving loans (the "Revolving Credit Facility"), which replaces the revolving credit facility under the Existing Credit Agreement. On the Closing Date, the Company used the proceeds of the Term Loan and borrowed
$115.0 million
of loans under the Revolving Credit Facility, together with cash on hand, to complete the Acquisition. The Second Amendment to the Credit Agreement provided an incremental $
50.0 million
of secured Term Loan and an incremental $
110.0 million
of borrowing capacity on the Revolving Credit Facility with maturity dates that were commensurate with the Amended Credit Agreement. The Company used the proceeds from the incremental Term Loan to repay the then outstanding amount drawn on the Revolving Credit Facility at the date of closing.

The Term Loan and loans under the Revolving Credit Facility initially bore interest at a rate equal to either, at the Company’s option, the LIBOR rate plus an applicable margin equal to
3.00%
per annum, or the prime lending rate plus an applicable margin equal to
2.00%
per annum. The applicable margins for the Term Loan and loans under the Revolving Credit Facility are subject to reduction or increase based upon the Company’s consolidated first lien net leverage ratio as of the end of each fiscal quarter. Effective February 2017, the Company's interest rate on these loans was reduced to the LIBOR rate plus the applicable margin of
2.25%
per an
num as a result of reaching certain financial covenant ratios.
The Company must also pay (i) a commitment fee of
0.40%
per annum on the actual daily amount by which the revolving credit commitment exceeds then-outstanding usage under the Revolving Credit Facility, also subject to reduction or increase based upon the Company’s consolidated first lien net leverage ratio, (ii) a letter of credit fee equal to the applicable margin that applies to LIBOR loans under the Revolving Credit Facility and (iii) a fronting fee of
0.125%
per annum, calculated on the daily amount available to be drawn under each letter of credit issued under the Revolving Credit Facility.

The Company is permitted to make voluntary prepayments with respect to the Revolving Credit Facility and the Term Loan at any time without payment of a premium. The Company is required to make mandatory prepayments of the Term Loan with (i) net cash proceeds from certain asset sales (subject to reinvestment rights) and (ii) net cash proceeds from certain issuances of debt. The Company is also required to maintain certain financial ratios under the Credit Agreement and there are customary covenants that limit the incurrence of debt, the payment of dividends, the disposition of assets, and making of certain payments. Substantially all of the Company's and certain of its domestic subsidiaries' tangible and intangible assets are pledged as collateral under the Credit Agreement.

Both of the aforementioned amendments were accounted for as a modification of the credit agreement and as a result,
$1.9 million
of additional loan origination discounts and bank lender fees were capitalized during the second quarter ended June 30, 2017 and
$5.7 million
during the first quarter ended March 31, 2016.

The Company has
$258.1 million
of available borrowings under the Revolving Credit Facility as of
June 30, 2017
.

Outstanding long-term debt and the interest rates in effect at
June 30, 2017
and
December 31, 2016
consist of the following (in thousands):

June 30,
2017

December 31,
2016

Revolving Credit Facility maturing 2021, based on LIBOR plus 2.25%

$

—

$

47,094

Term Loan due 2021, 3.46%, based on LIBOR plus 2.25%, less unamortized discount of $4,796 at June 30, 2017, effective rate of 3.62%

The Company recorded
$3.4 million
and
$3.7 million
of expense from amortizing debt issuance and discount costs during each of the
three months ended June 30, 2017
and
2016
, respectively. During the
six months ended June 30,
2017 and
2016
,
$6.8 million
and
$6.7 million
of amortization expense was recorded, respectively.

Total estimated principal payments due for the next five years as of
June 30, 2017
are as follows:

Year 1

$

4,822

Year 2

294,604

Year 3

44,128

Year 4

319,930

Year 5

—

Total principal payments

$

663,484

On August 15, 2018, the aggregate principal balance of the the 2018 Notes becomes due. The remaining principal requirements reflect quarterly payments under the Term Loan with the remaining balance payable in March 2021. The Revolving Credit Facility matures in March 2021.

7. Accumulated Other Comprehensive Loss

The components of accumulated other comprehensive loss were as follows (in thousands):

June 30, 2017

December 31, 2016

Foreign currency translation adjustments

$

(4,044

)

$

(4,019

)

Unrealized loss on investments

—

(1

)

Total accumulated other comprehensive loss

$

(4,044

)

$

(4,020

)

8. Fair Value

The Company defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company applies the following fair value hierarchy, which prioritizes the inputs used to measure fair value into three levels as follows:

Level 2
-Observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3
-Inputs that are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability.

The Company has financial assets and liabilities that are not required to be remeasured to fair value on a recurring basis. The carrying value of the Company’s cash and cash equivalents, accounts receivable, accounts payable, deferred consideration and accrued expenses approximates fair market value as of
June 30, 2017
and
December 31, 2016
due to the short maturity of these items. As of
June 30, 2017
, the fair value and carrying value of the Company’s 2018 Notes totaled
$256.9 million
and
$245.0 million
, respectively. As of
December 31, 2016
, the fair value and carrying value of the Company's 2018 Notes was $
248.6 million
and
$239.2 million
, respectively. The fair value of the 2018 Notes, including the equity component, was calculated by taking the quoted market price for the instruments multiplied by the principal amount. This is based on a Level 2 fair value hierarchy calculation obtained from quoted market prices for the Company’s long-term debt instruments that may not be actively traded at each respective period end. The Revolving Credit Facility and Term Loan are variable rate debt instruments indexed to 1-Month LIBOR that resets monthly and the fair value approximates the carrying value as of
June 30, 2017
and
December 31, 2016
. See Note 6,
Long-term Debt
, for additional information surrounding the amendment.

18

9. Income Taxes

The Company accounts for income taxes under the provisions of ASC 740,
Income Taxes
, using the liability method. ASC 740 requires recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the difference is expected to reverse.

The Company recorded income tax expense of
$6.8 million
and
$0.5 million
during the
three months ended June 30, 2017
and
2016
, and
$12.9 million
and
$1.5 million
during the
six months ended June 30, 2017
and
2016
, respectively, based upon the estimated annual effective tax rates for each year. The estimated annual effective tax rate for
2017
and
2016
reflects the impact of net unfavorable permanent book-tax differences, primarily driven by stock compensation costs estimated for the year and an increase in the projected year-end valuation allowance related to certain state and foreign deferred tax assets.

10. Commitments and Contingencies

Standby Letters of Credit

The Company utilizes letters of credit to back certain payment obligations relating to its facility operating leases. The Company had approximately $
7.3 million
in standby letters of credit as of
June 30, 2017
, $
1.9 million
of which were issued under the Revolving Credit Facility.

Legal Proceedings

From time to time, the Company and its subsidiaries receive inquiries from foreign, federal, state and local regulatory authorities or are named as defendants in various investigations, inquires or legal actions that are incidental to our business and arise out of or are related to claims made in connection with our marketing practices, customer and vendor contracts and employment related disputes. We believe that the resolution of these investigations, inquiries or legal actions will not have a material adverse effect on our financial position, marketing practices or results of operations. There were no material legal proceedings for which a loss was reasonably possible or estimable at
June 30, 2017
.

Indemnifications

The Company has agreed to indemnify its directors and executive officers for costs associated with any fees, expenses, judgments, fines and settlement amounts incurred by them in any action or proceeding to which any of them is, or is threatened to be, made a party by reason of his service as a director or officer, including any action by the Company, arising out of his services as the Company’s director or officer or his services provided to any other company or enterprise at the Company’s request.

Other

The Company is responsible for charging end customers certain taxes in numerous jurisdictions. In the ordinary course of its business, there are many transactions and calculations where the ultimate tax determination is uncertain. In the future, the Company may come under audit, which could result in changes to its tax estimates. The Company routinely assesses these matters and although the Company believes its tax estimates are reasonable, the final determination of tax audits could be materially different than the Company’s estimates, which would result in the Company recording an expense in the period in which a final determination is made.

11. Stock-Based Compensation and Stockholders' Equity

The Company records compensation expense for employee and director stock-based compensation plans based upon the fair value of the award in accordance with ASC 718, Compensation-Stock Compensation.

Equity Incentive Plans

19

The Company has the 2014 Equity Incentive Plan for the issuance of stock-based compensation, including but not limited to, common stock options and restricted shares to employees. In addition, the Company’s plan provides for grants of non-statutory stock options and restricted shares awards (“RSA’s”) to non-employee directors. The Company issues shares out of treasury stock, if available, otherwise new shares of common stock are issued upon the exercise of stock options and the granting of restricted shares.

Incentive stock options and non-statutory stock options issued generally vest ratably over
three
to
four
years, are contingent upon continued service and expire
ten
years from the grant date. Restricted share awards generally vest
25
percent each year over a
four
year period.

The Board of Directors or a committee thereof, administers all of the equity incentive plans and establishes the terms of options granted, including the exercise price, the number of shares subject to individual option awards and the vesting period of options, within the limits set forth in the plans. Options have a maximum term of
10
years and vest as determined by the Board of Directors.

The Company has additional equity incentive plans that are established in conjunction with its acquisitions. These plans are considered one-time, inducement awards of incentive stock options, non-statutory stock options and restricted shares. Once the inducement awards are granted, no additional shares, including forfeitures and cancellations, are available for future grant under these plans.

Yodle Equity Grants

In connection with the March 2016 Yodle acquisition, the Company granted
0.3 million
restricted shares that vest annually over a
four
year period and
0.3 million
stock options of which
25
percent vest
one
year from the date of grant and the remaining
75
percent vest monthly over a
three
year period for a total of
four
years.

In addition, the Company converted unvested and out of the money existing Yodle stock options to
1.3 million
stock options of the Company in connection with the March 9, 2016 acquisition of Yodle. The total value of the converted stock options was approximately
$8.3 million
. Approximately
$2.3 million
has been recorded as additional consideration representing the vesting that occurred prior to the closing of the acquisition. The remaining
$6.0 million
is amortized to stock compensation expense over the remaining service period of approximately
three
years.

Performance Shares

During the first quarter of
2017
and
2016
, the Compensation Committee of the Board of Directors approved the issuance of performance share equity awards. The targeted number of shares under a
100 percent
payout scenario for each of the
2017
and
2016
awards are
0.2
million shares and
0.1 million
shares, respectively, earned over the
three
year vesting periods, with one-third vesting each year. The actual number of shares that may be earned and issued, if any, may range from
0-200%
of the target number of shares granted. The range is based upon (1) the number of shares earned based upon the over achievement or under achievement of the financial measures for the annual performance period and (2) the number of shares earned being adjusted higher or lower depending on the performance of the Company's total shareholder return, compared against the Company's peer group.

Compensation expense related to the performance share stock plan for the
three months ended June 30, 2017
and
2016
was approximately and
$1.2 million
and
$0.4 million
, respectively. Compensation expense for the
six months ended June 30, 2017
and
2016
was
$1.9 million
and
$0.5 million
respectively. The 2016 tranche of the performance share award resulted in a payout of
43%
of the target shares, or approximately
41 thousand
shares. During the
six months ended June 30, 2017
, approximately
17 thousand
shares totaling
$0.3 million
were withheld by the Company for minimum income tax withholding requirements.

Stock Options

Compensation expense related to the Company’s stock option plans was
$2.0 million
and
$2.5 million
for the
three months ended June 30,
2017
and
2016
, respectively. Compensation expense for the
six months ended June 30, 2017
and
2016
was
$4.0 million
and
$4.7 million
, respectively. During the
three months ended June 30, 2017
and
2016
,
0.3 million
and
0.1 million
common shares were issued for options exercised, respectively. During the
six months ended June 30, 2017
and
2016
,
0.6 million
and
0.1 million
common shares were issued for options exercised, respectively. During the
six months ended June 30, 2017
and
2016
,
1.0 million
and
1.2 million
options were granted, respectively. The weighted-average grant-date fair value of an option granted during the
six months ended June 30, 2017
and
2016
was
$8.60
and
$8.14
, respectively.

The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant. Below are the assumption ranges used in calculating the fair value of options granted during the following periods:

20

Six months ended June 30,

2017

2016

Risk-free interest rate

1.90%

-

1.98%

1.20%

-

1.39%

Dividend yield

—

—

Expected life (in years)

5.05

-

5.07

4.97

-

5.17

Volatility

43.54%

-

44.67%

53.36%

-

53.82%

Restricted Stock

Compensation expense related to restricted stock plans for the
three months ended June 30,
2017
and
2016
, was approximately
$3.0 million
and
$2.5 million
, respectively. Compensation expense for the
six months ended June 30,
2017
and
2016
was
$5.8 million
and
$5.0 million
, respectively. During the
six months ended June 30,
2017
and
2016
, approximately
0.2 million
and
0.1 million
shares totaling approximately
$3.1 million
and
$2.5 million
, respectively, were withheld by the Company for minimum income tax withholding requirements. During each of the
three months ended June 30,
2017
and
2016
,
0.1 million
restricted common shares were granted. During the
six months ended June 30,
2017
and
2016
,
0.9 million
and
0.6 million
restricted common shares were granted, respectively. This excludes the Yodle restricted stock awards discussed above. The weighted-average grant-date fair value of restricted stock granted during the
three months ended June 30,
2017
and
2016
was
$20.32
and
$17.50
, respectively. The weighted-average grant-date fair value of restricted stock granted during the

six months ended June 30,
2017
and
2016
was
$20.43
and
$17.86
, respectively.

Stock Repurchases

On
November 5, 2014
, the Company's Board of Directors authorized a share repurchase program of up to
$100.0 million
of the Company's common stock expiring on
December 31, 2016
. In October 2016, the Company's Board of Directors authorized that the share repurchase program of the Company's outstanding securities be extended through December 31, 2018 and be increased by an additional
$100.0 million
.

The aggregate amount remaining available for repurchase under this program was
$108.0 million
at
June 30, 2017
. Repurchases under the repurchase programs may take place in the open market or in privately negotiated transactions, including structured and derivative transactions such as accelerated share repurchase transactions, and may be made under a Rule 10b5-1 plan. No common shares were repurchased during the three months ended June 30, 2017. During the
three months ended June 30,
2016
, the Company repurchased
0.3 million
common shares for a total of
$5.7 million
. During the
six months ended June 30,
2017
and
2016
, the Company repurchased approximately
0.1 million
and
1.0 million
common shares, respectively. The total amount repurchased during the six months ended
June 30, 2017
and 2016 was
$2.1 million
and
$16.9 million
, respectively.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Forward Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are subject to the “safe harbor” provisions created by those sections. Forward-looking statements are based on our management’s beliefs and assumptions and on information currently available to our management. All statements other than statements of historical facts are “forward-looking statements” for purposes of these provisions, including any projections or earnings. In some cases, you can identify forward-looking statements by terms such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “will,” “would” and similar expressions intended to identify forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors, which may cause our actual results, performance, time frames or achievements to be materially different from any future results, performance, time frames or achievements expressed or implied by the forward-looking statements. We discuss many of these risks, uncertainties and other factors in this Quarterly Report on Form 10-Q in greater detail under the heading “Risk Factors.” Given these risks, uncertainties and other factors, you should not place undue reliance on these forward-looking statements. Also, these forward-looking statements represent our estimates and assumptions only as of the date of this filing. You should read this Quarterly Report on Form 10-Q completely and with the understanding that our actual future results may be materially different from what we expect. We hereby qualify our forward-looking statements by these cautionary statements. Except as required by law, we assume no obligation to update these forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.

21

Safe Harbor

In the following discussion and analysis of results of operations and financial condition, certain financial measures may be considered “non-GAAP financial measures” under Securities and Exchange Commission rules. These rules require supplemental explanation and reconciliation, which is provided in this Quarterly Report on Form 10-Q.

We believe presenting non-GAAP net income attributable to common stockholders, non-GAAP net income per share attributable to common stockholders and non-GAAP operating income measures are useful to investors, because they describe the operating performance of the Company, excluding some recurring charges that are included in the most directly comparable measures calculated and presented in accordance with GAAP. We use these non-GAAP measures as important indicators of our past performance and in planning and forecasting performance in future periods. The non-GAAP financial information we present may not be comparable to similarly-titled financial measures used by other companies, and investors should not consider non-GAAP financial measures in isolation from, or in substitution for, financial information presented in compliance with GAAP.

Overview

Web.com Group, Inc. ("Web.com", the "Company" or "We") provides a full range of internet services to small businesses to help them compete and succeed online. Web.com meets the needs of small businesses anywhere along their lifecycle with affordable, subscription-based solutions including domains, hosting, website design and management, search engine optimization, online marketing campaigns, local sales leads, social media, mobile products and eCommerce solutions. For more information about the company, please visit http://www.web.com. The information obtained on or accessible through the Company's website is not incorporated into this Quarterly Report on Form 10-Q and you may not consider it a part of this Quarterly Report on Form 10-Q.

On January 31, 2017, the Company acquired DonWeb.com, a hosting and domain registration company catering to the Spanish-speaking market, located in Rosario, Argentina. The Company paid approximately $8.6 million at closing. The Company will pay the seller additional consideration of $2.0 million on January 31, 2021, present valued at $1.7 million as of the acquisition date for total consideration of $10.3 million. In addition, the agreement includes a four year earnout provision that entitles the seller up to $3.0 million contingent upon the post-acquisition business performance. The earnout provisions require the seller be employed with the Company and as such will be recorded as compensation expense. See Note 2,
Business Combinations
, for additional information surrounding the acquisition.

In March 2016, the Company completed the acquisition of 100% of the outstanding shares of Yodle, Inc., a Delaware corporation, ("Yodle"), for approximately
$341.3 million
, which included
$40.9 million
of deferred consideration. Yodle is a leading provider of cloud based local marketing solutions for small businesses with approximately 1,400 employees and 53,000 subscribers. Management's Discussion and Analysis includes the results of operations and cash flows of Yodle from March 9, 2016. See Note 2,
Business Combinations
, for additional information surrounding the acquisition.

Key Business Metrics

Management periodically reviews certain key business metrics to evaluate the effectiveness of our operational strategies, allocate resources and maximize the financial performance of our business. These key business metrics include:

Average Revenue per User (Subscriber)

Monthly average revenue per user, or ARPU, is a metric we measure on a quarterly basis. We define ARPU as quarterly non-GAAP subscription revenue divided by the average of the number of subscribers at the beginning of the quarter and the number of subscribers at the end of the quarter, divided by the measurement period in months. We exclude from subscription revenue the impact of the fair value adjustments to deferred revenue resulting from acquisition-related write downs. The fair market value adjustments were $
1.3 million
and $
6.0 million
for the
three months ended June 30,
2017
and
2016
, respectively. The fair market value adjustments were $
3.0 million
and $
14.6 million
for the
six months ended June 30,
2017
and
2016
, respectively. ARPU is the key metric that allows management to evaluate the impact on monthly revenue from product pricing, product sales mix trends, and up-sell/cross-sell effectiveness.

Customer Retention Rate (Retention Rate)

22

Customer retention rate is defined as the trailing twelve month retention metric which we measure as the subscribers at the end of the period (less acquired customers, if applicable) divided by the sum of the subscribers at the beginning of the period and the new subscribers added during the last twelve months. Customer cancellations in the trailing twelve months include cancellations from subscriber additions, which is why we include subscriber additions in the denominator. Retention rate is the key metric that allows management to evaluate whether we are retaining our existing subscribers in accordance with our business plan.

Net Subscriber Additions

We define total subscribers as the approximate number of subscribers that, as of the end of a period, are identified as subscribing to our products on a paid basis. A unique subscriber with subscriptions of more than one brand or with more than one distinct billing relationship or product subscription with us, are counted as one subscriber. Total subscribers for a period reflects adjustments to add or subtract subscribers as we integrate acquisitions and/or are otherwise able to identify subscribers that meet, or do not meet, this definition of total subscribers.

We maintain and grow our subscriber base through a combination of adding new subscribers and retaining existing subscribers. We define net subscriber additions in a particular period as the gross number of new subscribers added during the period, less subscriber cancellations during the period. For this purpose, we only count as new subscribers those customers whose subscriptions have extended beyond the free trial period, if applicable.

We review this metric to evaluate whether we are effectively implementing our business plan. An increase in net subscriber additions could signal an increase in subscription revenue, higher customer retention, and an increase in the effectiveness of our sales efforts. Similarly, a decrease in net subscriber additions could signal decreased subscription revenue, lower customer retention, and a decrease in the effectiveness of our sales efforts. Net subscriber additions above or below our business plan could have a long-term impact on our operating results due to the subscription nature of our business.

Sources of Revenue

Subscription Revenue

We currently derive a substantial majority of our revenue from fees associated with our subscription services, which generally include web services, online marketing, eCommerce, and domain name registration offerings. We bill a majority of our customers in advance through their credit cards, bank accounts, or business merchant accounts. The revenue is recognized on a daily basis over the life of the contract.

Professional Services and Other Revenue

We generate professional services revenue from custom website design, eCommerce store design and support services. Our custom website design and eCommerce store design work is typically billed on a fixed price basis and over very short periods. Generally, revenue is recognized when the service has been completed.

Cost of Revenue

Cost of revenue consists of expenses related to compensation of our web page development staff, domain name registration costs, directory listing fees, eCommerce store design, online marketing costs for services provided, billing costs, hosting expenses, and allocated occupancy overhead costs. The Company allocates occupancy overhead costs such as rent and utilities to all departments based on headcount. Accordingly, general overhead expenses are reflected in each cost of revenue and operating expense category.

Operating Expenses

Sales and Marketing Expense

The Company's direct marketing expenses include the costs associated with the online marketing channels used to promote our services and acquire customers. These channels include search marketing, affiliate marketing, direct television advertising and partnerships. Sales and marketing costs consist primarily of compensation and related expenses for our sales and marketing staff as well as our customer support staff and allocated occupancy overhead costs. Sales and marketing expenses also include marketing programs, such as advertising, corporate sponsorships and other corporate events and communications.

23

We plan to continue to invest in sales and marketing to add new subscription customers, and increase sales of additional and new services and products to our existing customer base. We also plan to continue investing in direct response television and radio advertising. We have invested a portion of our incremental marketing budget in branding activities such as the umbrella sponsorship of the Web.com Tour and other sports marketing activities.

Technology and development

Technology and development represents costs associated with creation, development and distribution of our products and websites. Technology and development expenses primarily consist of headcount-related costs associated with the design, development, deployment, testing, operation, enhancement of our products and costs associated with the data centers and all systems infrastructure costs supporting those products as well as all administrative platforms and allocated occupancy overhead costs.

General and Administrative Expense

General and administrative expenses consist of compensation and related expenses for executive, finance, and administration, as well as professional fees, corporate development costs, other corporate expenses, and allocated occupancy overhead costs.

Depreciation and Amortization Expense

Depreciation and amortization expenses relate primarily to our intangible assets recorded due to the acquisitions we have completed, as well as depreciation expense from computer and other equipment, internally developed software, furniture and fixtures, and building and improvement expenditures. Depreciation is expected to increase for the remainder of 2017 as we continue to increase our efforts for internally developed software projects. Amortization expense is expected to continue to decline during the remainder of 2017 as a result of certain intangible assets becoming fully amortized.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of financial statements requires us to make estimates, assumptions and judgments that affect our assets, liabilities, revenues and expenses, and disclosure of contingent assets and liabilities. We base these estimates and assumptions on historical data and trends, current fact patterns, expectations and other sources of information we believe are reasonable. Actual results may differ from these estimates. For a full description of our critical accounting policies, see Item 7 —
Management's Discussion and Analysis of Financial Condition and Results of Operations
in our
2016
Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 28, 2017.

Results of Operations

Comparison of the results for the
three months ended June 30, 2017
to the
three months ended June 30, 2016

The operations of DonWeb.com began integrating with the existing legacy Web.com operations immediately following the closing of the acquisition on January 31, 2017. The operations of Yodle began integrating with the existing legacy Web.com operations immediately following the closing of the acquisition on March 9, 2016. As such, our results of operations including revenue or ARPU is not specifically segregated subsequent to these acquisitions, nor would it be indicative of each of the standalone entities.

Included in the three months ended June 30, 2016 are adjustments for the correction of an immaterial error in the classification of infrastructure costs, which were previously classified within the cost of revenue financial statement line item but have been reclassified to technology and development. In addition, in an effort to report operating expenses in a manner more in line with functional areas and to simplify the related accounting, the Company has changed its classification of certain information technology related operating expenses from general and administrative expenses to technology and development expenses. This reclassification was applied retrospectively to all periods presented. The Company also reclassified customer support costs previously included in cost of revenue to sales and marketing on a prospective basis. See Note 1,
The Company and Summary of Significant Accounting Policies,
for a summary of the changes reflected herein.

The following table sets forth our key business metrics:

24

Three months ended June 30,

2017

2016

(unaudited)

Ending Subscribers as of June 30,

3,490,000

3,443,000

Net subscriber (reductions) additions

(12,460

)

19,880

Average revenue per user (monthly)

$

17.72

$

18.66

Subscriber counts decreased by approximately
12,000
subscribers during the
three months ended June 30, 2017
, as compared to an increase of approximately
20,000
subscribers during the
three months ended June 30, 2016
. The decline in subscriber counts was in part driven by a shift in our sales strategy towards higher ARPU services, which results in lower new customer additions.
Our rolling twelve month retention rate as of
June 30, 2017
was
84.4%
compared to
86.5%
during the same prior year period. The retention rate was also down sequentially during the second quarter of 2017 from
84.9%
during the quarter ended March 31, 2017. Relative to our large base of domain subscribers, Yodle’s products are higher churn, which we continue to view as an opportunity for improvement. In addition, the overall mix shift away from domain subscribers negatively impacted retention. During the six months ended June 30, 2017, we made progress positioning our product portfolio and aligning our sales channels to improve customer satisfaction and ultimately retention.

25

Revenue

Three months ended June 30,

2017

2016

(unaudited, in thousands)

Revenue:

Subscription

$

184,511

$

186,121

Professional services and other

2,220

1,697

Total revenue

$

186,731

$

187,818

Total revenue decreased to $
186.7 million
in the
three months ended June 30, 2017
from $
187.8 million
in the
three months ended June 30, 2016
. Total revenue for the respective 2017 and 2016 periods includes
$1.3 million
and
$6.0 million
of unfavorable impact resulting from amortizing deferred revenue. The unfavorable impact decreased
$4.7 million
during the
three months ended June 30, 2017
, compared to the same prior period. The deferred revenue resulted from acquisition fair value adjustments recorded during 2017 and 2016. The remaining
$5.8 million
change in revenue during the
three months ended June 30, 2017
when compared to the same prior year period, resulted primarily from lower Yodle legacy products revenues as well as decreased domain product related revenues and Do-It-Yourself ("DIY") website volume. These declines in revenue were partially offset by an increase in our vertical marketing solutions revenue and higher lead generation, email and custom website revenues.

Subscription Revenue
. Subscription revenue decreased during the
three months ended June 30, 2017
, to
$184.5 million
from
$186.1 million
during the
three months ended June 30, 2016
. The decrease is primarily due to drivers mentioned above, excluding the $0.6 million favorable impact from custom design website services.

Professional Services and Other Revenue.
Professional services revenue was
31%
higher at
$2.2 million
in the
three months ended June 30, 2017
up from
$1.7 million
for the
three months ended June 30, 2016
. The increase was principally driven by a higher volume of custom design professional services.

Cost of Revenue and Operating Expenses

Three months ended June 30,

2017

2016

(unaudited, in thousands)

Cost of Revenue and Operating Expenses:

Cost of revenue

$

58,527

$

58,758

Sales and marketing

49,230

60,135

Technology and development

17,323

19,732

General and administrative

21,252

18,564

Restructuring expense

—

778

Asset impairment

—

—

Depreciation and amortization

17,401

22,273

Total cost of revenue and operating expenses

$

163,733

$

180,240

Cost of Revenue.
Cost of revenue decreased
$0.2 million
during the
three months ended June 30, 2017
, compared to the
three months ended June 30, 2016
. The decrease was due to declines in partner-related commissions and hosting costs, as well as declines in salaries and benefits. These lower costs were partially offset by increased online marketing expenses, as well as the inclusion of the operating costs from the DonWeb acquisition that closed on January 31, 2017.

Sales and Marketing Expenses.
Sales and marketing expenses decreased
18%
or
$10.9 million
to
$49.2 million
, or
26%
of total revenue, from
$60.1 million
, or
32%
of revenue, for the comparable periods. The decline was primarily due to $6.7 million of lower online, television and affiliate marketing expenses from scaling certain advertising campaigns. In addition, salaries and benefits decreased $2.8 million mainly driven by lower headcount at Yodle acquisition in March 2016 and a decline in

26

facilities expenses of $1.3 million from exiting two of the three floors of the Yodle New York, New York office, as well as exiting the St. Lucia call center facility. Offsetting the above declines in costs were incremental costs resulting from the acquisition of DonWeb in January 2017.

Technology and Development Expenses.
Technology and development expenses of $
17.3 million
, or
9%
of total revenue, decreased by
$2.4 million
during the
three months ended June 30, 2017
from
$19.7 million
, or
11%
of total revenue during the
three months ended June 30, 2016
. The decrease was driven by lower salaries and benefits of $2.1 million during the three months ended June 30, 2017 compared to the same prior year period resulting from higher labor dollars that were capitalized for internally developed software projects in 2017, as well as eliminating certain Yodle positions. In addition, facilities expense declined by approximately $0.4 million in the comparable periods partially due to exiting the New York, New York space as noted above.

General and Administrative Expenses.
General and administrative expenses increased
$2.7 million
to
$21.3 million
, or
11%
of total revenue, during the
three months ended June 30, 2017
, as compared to
$18.6 million
, or
10%
of total revenue during the
three months ended June 30, 2016
. The increase was due to higher general and administrative expenses of $2.3 million from higher incentive-based benefits, as well as $0.2 million of increased indirect taxes.

Restructuring Expense.
For the three months ended June 30, 2016, restructuring expense was
$0.8 million
, primarily from terminating certain Yodle employees. There were no restructuring charges during the quarter ended June 30, 2017.

Depreciation and Amortization Expense.
Depreciation and amortization expense decreased
$4.9 million
to
$17.4 million
during the
three months ended June 30, 2017
from
$22.3 million
during the
three months ended June 30, 2016
. Amortization expense declined as certain Network Solutions' intangible assets became fully amortized. In addition, amortization of Yodle intangible assets was lower during the three months ended June 30, 2017 compared to same prior year period as the estimate of the intangible valuation acquired was finalized during the third quarter of 2016, which resulted in a reduction of amounts allocated to definite-lived intangibles. Depreciation expense decreased by $0.1 million during the
three months ended June 30, 2017
.

Interest Expense, net.
Net interest expense totaled
$8.1 million
and
$8.7 million
for the
three months ended June 30, 2017
and
2016
, respectively. Included in the interest expense for each of the
three months ended June 30,
2017
and
2016
, was $3.7 million of deferred financing fee and loan origination discount amortization. Loan interest expense, excluding amortization, decreased $0.5 million during the
second quarter
ended
June 30, 2017
, compared to the
second quarter
of
2016
, primarily due to higher overall lower levels during the current year quarterly period ended.

Income Tax Expense. We recorded income tax expense of
$6.8 million
and
$0.5 million
during the
three months ended June 30, 2017
and
2016
, respectively, based upon our estimated annual effective tax rates for each year. Our estimated annual effective tax rate for 2017 and 2016 reflects the impact of net unfavorable permanent book-tax differences primarily driven by stock compensation estimated for the year and an increase in the projected year-end valuation allowance related to certain state and foreign deferred tax assets.

Comparison of the results for the
six months ended June 30, 2017
to the
six months ended June 30, 2016
.

The operations of DonWeb.com began integrating with the existing legacy Web.com operations immediately following the closing of the acquisition on January 31, 2017. The operations of Yodle began integrating with the existing legacy Web.com operations immediately following the closing of the acquisition on March 9, 2016. As such, our results of operations including revenue is not specifically segregated subsequent to these acquisitions, nor would it be indicative of each of the standalone entities.

Included in the
six months ended June 30, 2016
are adjustments for the correction of an immaterial error in the classification of infrastructure costs, which were previously classified within the cost of revenue financial statement line item but have been reclassified to technology and development. In addition, in an effort to report operating expenses in a manner more in line with functional areas and to simplify the related accounting, the Company has changed its classification of certain information technology related operating expenses from general and administrative expenses to technology and development expenses. This reclassification was applied retrospectively to all periods presented. The Company also reclassified customer support costs previously included in cost of revenue to sales and marketing on a prospective basis. See Note 1,
The Company and Summary of Significant Accounting Policies,
for a summary of the changes reflected herein.

27

Revenue

Six months ended June 30,

2017

2016

(unaudited, in thousands)

Revenue:

Subscription

367,859

329,312

Professional services and other

3,991

3,304

Total revenue

$

371,850

$

332,616

Total revenue increased to $
371.9 million
in the
six months ended June 30, 2017
from $
332.6 million
in the
six months ended June 30, 2016
. Total revenue includes
$3.0 million
and
$14.6 million
of unfavorable impact resulting from amortizing into revenue, deferred revenue that was recorded at fair value on the respective acquisition dates. The unfavorable impact decreased $11.6 million during the
six months ended June 30, 2017
compared to the same prior period. The remaining $27.7 million increase in revenue during the
six months ended June 30, 2017
, was driven principally from the inclusion of Yodle for the entire 2017 period compared to a partial period in 2016, as well as increases in lead generation and email revenues. These increases were partially offset by a decline in DIY products, such as hosting and website presence, in addition to lower domain and domain-related product revenues.

Subscription Revenue
. Subscription revenue increased during the
six months ended June 30, 2017
, to
$367.9 million
from
$329.3 million
during the
six months ended June 30, 2016
. The increase was primarily due to the inclusion of Yodle for the entire six months ended June 30, 2017, compared to the inclusion of Yodle for the period from March 9, 2016 through June 30, 2016. In addition, subscription revenue increased due to the drivers discussed above.

Professional Services and Other Revenue.
Professional services revenue increased
21%
to
$4.0 million
in the
six months ended June 30, 2017
from
$3.3 million
for the
six months ended June 30, 2016
. The increase was principally driven by a higher volume of custom design professional services.

Cost of Revenue and Operating Expenses

Six months ended June 30,

2017

2016

(unaudited, in thousands)

Cost of Revenue and Operating Expenses:

Cost of revenue

$

116,450

$

108,809

Sales and marketing

100,141

102,562

Technology and development

34,324

32,358

General and administrative

41,108

35,296

Restructuring expense

312

914

Asset impairment

143

—

Depreciation and amortization

35,834

38,186

Total cost of revenue and operating expenses

$

328,312

$

318,125

Cost of Revenue.
Cost of revenue increased
7%
or
$7.6 million
during the
six months ended June 30, 2017
, compared to the
six months ended June 30, 2016
. The increase was primarily driven by the inclusion of a full six months of costs associated with Yodle in 2017 compared to a partial period of activity in 2016. Additionally, we incurred $1.2 million of increased software related services and higher online marketing and email costs. Offsetting the increases were declines in the following: partner-related commissions of $2.2 million, hosting expenses of $1.1 million, as well as lower salaries and benefits and domain-related costs.

28

Sales and Marketing Expenses.
Sales and marketing expenses decreased
2%
to
$100.1 million
, or
27%
of total revenue, during the
six months ended June 30, 2017
from
$102.6 million
, or
31%
of revenue, during the
six months ended June 30, 2016
. Sales and marketing expenses decreased year over year due to a decline of $14.1 million in marketing expenses, as we strategically focused efforts on reducing certain television, online and affiliate marketing programs partially offset by the inclusion of Yodle for the entire six month period ended June 30, 2017 compared to the same prior year period and an increase in salaries and benefits.

Technology and Development Expenses.
Technology and development expenses of
$34.3 million
, or
9%
of total revenue, increased by
$2.0 million
during the
six months ended June 30, 2017
, from
$32.4 million
, or
10%
of total revenue during the
six months ended June 30, 2016
. The increase in technology and developments expenses is principally driving by the inclusion of a full six months of Yodle during the year to date period ended June 30, 2017 compared to the same prior year period. The higher costs were driven from salaries and benefits expenses.

General and Administrative Expenses.
General and administrative expenses increased
$5.8 million
to
$41.1 million
, or
11%
of total revenue, during the
six months ended June 30, 2017
, as compared to
$35.3 million
, or
11%
of total revenue during the
six months ended June 30, 2016
. The increase was due to higher general and administrative expenses resulting from the Yodle acquisition and $6.4 million of increased incentive-based compensation. These increases were partially offset by $3.1 million of lower corporate developments costs as a result of the complexity of the Yodle acquisition in 2016.

Restructuring Expense.
For the
six months ended June 30, 2017
and
2016
, restructuring expense was
$0.3 million
and
$0.9 million
, respectively, primarily from terminating certain Yodle employees.

Asset impairment
. During the
six months ended June 30, 2017
, we recorded a
$0.1 million
impairment charge on our domain name inventory.

Depreciation and Amortization Expense.
Depreciation and amortization expense decreased
$2.4 million
to
$35.8 million
during the
six months ended June 30, 2017
from
$38.2 million
during the
six months ended June 30, 2016
. Amortization expense decreased by $3.2 million during the six months ended June 30, 2017 as certain intangible assets became fully amortized. In addition, amortization of Yodle intangible assets was lower during the six months ended June 30, 2017 compared to same prior year period as the estimate of the intangible valuation acquired was finalized during the third quarter of 2016, which resulted in a reduction of amounts allocated to definite-lived intangibles partially offset by an increase in amortization expense as a result of reflecting a full six months of Yodle as compared to a partial period in the prior year. Depreciation expense increased by $0.8 million during the
six months ended June 30, 2017
which is driven principally by the Yodle acquisition.

Interest Expense, net.
Net interest expense amounted to
$16.0 million
and
$14.3 million
for the
six months ended June 30, 2017
and
2016
, respectively. Included in the interest expense for the
six months ended June 30, 2017
and
2016
, is $7.4 million and $6.7 million of deferred financing fee and loan origination discount amortization, respectively. Loan interest expense, excluding amortization, increased $1.0 million during the six months ended
June 30, 2017
, compared to the six months ended
2016
, primarily due to additional debt incurred from financing the Yodle acquisition in March 2016.

Income Tax Expense.
We recorded income tax expense of
$12.9 million
and
$1.5 million
during the
six months ended June 30, 2017
and
2016
, respectively, based upon our estimated annual effective tax rates for each year. Our estimated annual effective tax rate for 2017 and 2016 reflects the impact of net unfavorable permanent book-tax differences primarily driven by stock compensation estimated for the year and an increase in the projected year-end valuation allowance related to certain state and foreign deferred tax assets.

Outlook.
For the remainder of 2017, we expect stability to modest sequential growth in our non-GAAP revenue through the back half of the year driven by our value added services revenue offset by declines in DIY and domains. For the full year, we anticipate year over year growth primarily due to a full year contribution from our Yodle acquisition. We expect to generate strong cash flow from operations, which could be used to pay down debt and repurchase common shares.

29

Liquidity and Capital Resources

The following table summarizes total cash flows for operating, investing and financing activities for the
six months ended June 30,
(in thousands):

Six months ended June 30,

2017

2016

(unaudited, in thousands)

Net cash provided by operating activities

$

76,966

$

45,288

Net cash used in investing activities

(19,160

)

(312,868

)

Net cash (used in) provided by financing activities

(44,792

)

257,857

Effect of exchange rate changes on cash

(12

)

(33

)

Increase (decrease) in cash and cash equivalents

$

13,002

$

(9,756

)

Cash Flows

At
June 30, 2017
, we had $
33.4 million
of cash and cash equivalents and $
189.6 million
in negative working capital, as compared to $
20.4 million
of cash and cash equivalents and $
209.3 million
in negative working capital at
December 31, 2016
. The majority of the negative working capital continues to be due to significant balances of deferred revenue, partially offset by deferred expenses, which is amortized to revenue or expense rather than settled with cash. Also included in the negative working capital as of
June 30, 2017
is the deferred consideration of $22.7 million, primarily resulting from the Yodle acquisition and is payable to the sellers on March 9, 2018. We expect cash generated from operating activities to be more than sufficient to meet our future working capital and debt servicing requirements.

Net cash provided by operating activities for the
six months ended June 30, 2017
increased
$31.7 million
to
$77.0 million
, primarily driven by the Yodle acquisition. Included in the cash provided by operating activities is $0.8 million and $3.9 million of acquisition-related transaction costs that were paid during the
six months ended June 30, 2017
and
2016
, respectively. Also contributing to the increase in cash provided by operations and synergies realized from the Yodle acquisition during the
six months ended June 30, 2017
compared to the same prior year period, is the absence of funding $6.4 million of letters of credit for Yodle operating leases that occurred during the first quarter of 2016. Partially offsetting the increases were $3.9 million of restructuring related severance and lease payments that have been made in 2017 and an increase in cash paid for interest of $1.9 million in the
six months ended June 30, 2017
compared to the same prior period. Finally, the deferred revenue and accrued expense timing was unfavorable during the
six months ended June 30, 2017
compared to the
six months ended June 30, 2016
.

Net cash used in investing activities during the
six months ended June 30, 2017
was $
19.2 million
, as compared to
$312.9 million
in the
six months ended June 30, 2016
. The
six months ended June 30, 2017
included a payment of
$8.6 million
for 100% of the outstanding shares of DonWeb.com whereas, the
six months ended June 30, 2016
included a $300.3 million payment for the acquisition of 100% of the outstanding shares of Yodle, Inc., a leader in value added digital marketing solutions that further solidifies our position as a leading national provider in this space and $3.0 million for the acquisition of TORCHx. See Note 2,
Business Combinations
, for additional information surrounding these acquisitions. Capital expenditures of
$10.6 million
during the
six months ended June 30, 2017
increased by
$2.3 million
when compared to the same period prior year due to increased capitalized labor as a result of building new operational functionality that supports the consolidation of customer transactions and billing platforms, as well as, the development of a lead traffic and advertising spend value reporting platform.

Net cash used in financing activities during the
six months ended June 30, 2017
, reflects an $18.9 million consideration payment made to the sellers of Yodle on March 9, 2017. The cash provided by financing activities during the
six months ended June 30, 2016
includes increases in long term debt from our amended credit agreement to fund the acquisition of Yodle Inc., on March 9, 2016. During the
six months ended June 30, 2017
and 2016, common stock repurchases of approximately
0.1 million
and
1.0 million
common shares totaling
$2.1 million
and
$16.9 million
, respectively, were made in connection with our stock repurchase program announced on November 5, 2014. Proceeds received from the exercise of stock options increased by
$7.8 million
to $
9.0 million
in the
six months ended June 30, 2017
when compared to the same prior year period. Approximately $
3.6 million
and
$3.2 million
of cash was used to pay employee minimum tax withholding requirements in lieu of receiving common shares during the
six months ended June 30, 2017
and
2016
, respectively. The six months ended June 30, 2017 and 2016 included
$1.9 million
and
$5.7 million
of loan origination and lender fees, respectively in connection with the respective May 2017 amendment and March 2016 amendment to the credit agreement. We drew $7.0 million on our revolving credit facility during the six months ended June 30, 2017 in anticipation of funding requirements for the consideration payment to the

30

sellers of Yodle and subsequently repaid the amount in April 2017. The remaining amount outstanding on the revolving credit facility was converted to additional term loan in May 2017. Payments on the term loan amounted to
$28.0 million
and
$4.9 million
during the
six months ended June 30, 2017
and
2016
, respectively.

Debt Covenants

The second amendment to the credit agreement dated May 18, 2017 continues to require that we not exceed a maximum first lien net leverage ratio and that we maintain a minimum consolidated cash interest expense to consolidated EBITDA coverage ratio as set forth in the table below. The first lien net leverage ratio is defined as the total of the outstanding consolidated first lien debt minus up to $50.0 million of unrestricted cash and cash equivalents, divided by consolidated EBITDA. The consolidated interest coverage ratio is defined as consolidated EBITDA divided by consolidated cash interest expense. Consolidated EBITDA is defined as consolidated net income before (among other things) interest expense, income tax expense, depreciation and amortization, impairment charges, restructuring costs, changes in deferred revenue and deferred expenses, stock-based compensation expense, non-cash losses, acquisition-related costs and includes the benefit of annualized synergies due to the Yodle acquisition.

Outstanding debt as of
June 30, 2017
for purposes of the First Lien Net Leverage Ratio was approximately
$371.3 million
. The covenant calculations as of
June 30, 2017
on a trailing 12-month basis are as follows:

Covenant Description

Covenant Requirement as of

June 30, 2017

Ratio at June 30, 2017

Favorable/

(Unfavorable)

Consolidated Net Debt to EBITDA

Not greater than 3.65

1.97

1.68

Consolidated Interest Coverage Ratio

Greater than 2.00

9.59

7.59

In addition to the financial covenants listed above, the credit agreement includes customary covenants that limit (among other things) the incurrence of debt, the disposition of assets, and making of certain payments. Substantially all of our tangible and intangible assets collateralize the long-term debt as required by the credit agreement.

Stock Repurchase Plan

In October 2014, our Board of Directors authorized a plan for the repurchase of up to $100.0 million of our outstanding common shares through December 31, 2016. In October 2016, our Board of Directors approved an increase in our current stock repurchase plan by $100 million and extended the expiration date of the outstanding available shares to December 31, 2018. Therefore, as of
June 30, 2017
, there was $108.0 million available for repurchase under this program.

The timing, price and volume of repurchases will be based on market conditions, restrictions under applicable securities laws and other factors. The repurchase program does not require us to repurchase any specific number of shares, and we may terminate the repurchase program at any time.

The repurchases may be made periodically in a variety of ways including open market purchases at prevailing market prices, in privately negotiated transactions, or pursuant to a 10b5-1 plan. See Item 2,
Issuer Repurchases of Equity Securities
, for additional information.

New Accounting Standards

See Note 1.
The Company and Summary of Significant Accounting Policies
, for a discussion of recently issued accounting pronouncements that may affect our financial results and disclosures in future periods.

Non-GAAP Financial Measures

In addition to our financial information presented in accordance with U.S. GAAP, management uses certain “non-GAAP financial measures” within the meaning of the SEC Regulation G. Generally, a non-GAAP financial measure is a numerical measure of a company's operating performance, financial position or cash flows that excludes or includes amounts that are included in or excluded from the most directly comparable measure calculated and presented in accordance with U.S. GAAP.

We believe presenting non-GAAP measures is useful to investors because it describes the operating performance of the company, excluding some recurring charges that are included in the most directly comparable measures calculated and presented in accordance with GAAP. Our management uses these non-GAAP measures as important indicators of the Company's past performance and in

31

planning and forecasting performance in future periods. The non-GAAP financial information we present may not be comparable to similarly-titled financial measures used by other companies, and investors should not consider non-GAAP financial measures in isolation from, or in substitution for, financial information presented in compliance with GAAP. You are encouraged to review the reconciliation of non-GAAP financial measures to GAAP financial measures included in this Quarterly Report on Form 10-Q.

Relative to each of the non-GAAP measures Web.com presents, management further sets forth its rationale as follows:

Monthly average revenue per user, or ARPU
. ARPU is a metric the Company measures on a quarterly basis. The Company defines ARPU as quarterly non-GAAP subscription revenue divided by the average of the number of subscribers at the beginning of the quarter and the number of subscribers at the end of the quarter, divided by three months. The Company excludes from subscription revenue the impact of the fair value adjustments to deferred revenue resulting from acquisition-related write downs.

In respect of the foregoing, Web.com provides the following supplemental information to provide additional context for the use and consideration of the non-GAAP financial measures used in this quarterly report Form 10-Q:

•

Fair value adjustment to deferred revenue
. Web.com has recorded fair value adjustments to acquired deferred revenue in accordance with ASC 805-10-65. Web.com excludes the impact of these adjustments from its non-GAAP revenue measures, because doing so results in non-GAAP revenue which are more reflective of ongoing operating results and more comparable to historical operating results, since the majority of the Company's revenue is recurring subscription revenue. Excluding the fair value adjustment to deferred revenue facilitates management's internal comparisons to Web.com's historical operating results.

Web.com Group, Inc.

Reconciliations of GAAP to Non-GAAP Results

(in thousands, except for per share data)

(unaudited)

Three months ended June 30,

2017

2016

Reconciliation of GAAP revenue to non-GAAP subscription revenue used in ARPU

We have no material changes outside the ordinary course of business to the Contractual Obligations table as presented in Item 7 -
Management's Discussion and Analysis of Financial Condition and Results of Operations
of our
2016
Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 28, 2017.

Off-Balance Sheet Arrangements

As of
June 30, 2017
and
December 31, 2016
, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

32

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

There have not been any material changes to the disclosure about market risk since the year ended December 31, 2016. For a full description of our disclosures about market risk, see Item 7A —
Quantitative and Qualitative Disclosures About Market Risk,
in our
2016
Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 28, 2017.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures.

Based on their evaluation as of
June 30, 2017
, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) were effective at the reasonable assurance level to ensure that the information required to be disclosed by us in this quarterly report on Form 10-Q was recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules, and that such information is accumulated and communicated to us to allow timely decisions regarding required disclosures.

Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives. Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our Company have been detected.

Changes in Internal Controls Over Financial Reporting.

There have been no changes in our internal controls over financial reporting during the quarter ended
June 30, 2017
that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

PART II—OTHER INFORMATION

Item 1. Legal Proceedings.

From time to time, the Company and its subsidiaries receive inquiries from foreign, federal, state and local regulatory authorities or are named as defendants in various legal actions that are incidental to our business and arise out of or are related to claims made in connection with our marketing practices, customer and vendor contracts and employment related disputes. We believe that the resolution of these investigations, inquiries or legal actions will not have a material adverse effect on our financial position, marketing practices or results of operations. There were no material legal matters for which a loss was reasonably possible or estimable at
June 30, 2017
.

Item 1A. Risk Factors.

In evaluating Web.com and our business, you should carefully consider the risks and uncertainties set forth below, together with all of the other information in this report. The following risks should be read in conjunction with our “Management's Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes. The risks and uncertainties described below are not the only ones we face. If any of the following risks occur, our business, financial condition, operating results, and prospects could be materially harmed. In that event, the price of our common stock could decline, and you could lose part or all of your investment.

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The risks relating to our business and industry, as set forth in our Annual Report on Form 10-K for the year ended December 31, 2016, filed with the Securities and Exchange Commission on February 28, 2017, are set forth below and are unchanged substantively at
June 30, 2017
.

Our operating results are difficult to predict and fluctuations in our performance may result in volatility in the market price of our common stock.

Due to our evolving business model and the unpredictability of our evolving industry our operating results are difficult to predict. We expect to experience fluctuations in our operating and financial results due to a number of factors, such as:

These factors and others all tend to make the timing and amount of our revenue unpredictable and may lead to greater period-to-period fluctuations in revenue than we have experienced historically.

Additionally, in light of current global and U.S. economic conditions, we believe that our quarterly revenue and results of operations are likely to vary significantly in the future and that period-to-period comparisons of our operating results may not be meaningful. The results of one quarter may not be relied on as an indication of future performance. If our quarterly revenue or results of operations fall below the expectations of investors or securities analysts, the price of our common stock could decline substantially.

We may expand through acquisitions of, or investments in, other companies or technologies, which may result in additional dilution to our stockholders, consume resources that may be necessary to sustain our business and increase debt for funding acquisitions.

One of our business strategies is to acquire complementary services, technologies or businesses. In connection with one or more of those transactions, we may:

incur debt that could have terms unfavorable to us or that we might be unable to repay.

Business acquisitions also involve the risk of unknown liabilities associated with the acquired business. In addition, we may not realize the anticipated benefits of any acquisition, including securing the services of key employees. Incurring unknown liabilities or the failure to realize the anticipated benefits of an acquisition could seriously harm our business.

The failure to integrate successfully the businesses of Web.com and an acquired company, if any, in the future within the expected timeframe would adversely affect the combined company's future results.

One of our business strategies is to acquire complementary services, technologies or businesses. The success of any future acquisitions, including our acquisitions of Yodle, TORCHx and DonWeb, will depend, in large part, on the ability of the combined company to realize the anticipated benefits, including annual net operating synergies, from combining the businesses of Web.com and the acquired company. To realize these anticipated benefits, the combined company must successfully integrate the businesses of Web.com and an acquired company. This integration will be complex and time consuming.

34

The failure to integrate successfully and to manage successfully the challenges presented by the integration process may result in the combined company's failure to achieve some or all of the anticipated benefits of the acquisition.

Potential difficulties that may be encountered in the integration process include the following:

•

lost sales and customers as a result of customers of either of the two companies deciding not to do business with the combined company;

•

complexities associated with managing the larger, more complex, combined business;

•

integrating personnel from the two companies while maintaining focus on providing consistent, high quality services and products;

•

potential unknown liabilities and unforeseen expenses, delays or regulatory conditions associated with the acquisition; and

•

performance shortfalls at one or both of the companies as a result of the diversion of management's attention caused by completing the acquisition and integrating the companies' operations.

Successful integration of Web.com's and an acquired company's operations, products and personnel may place a significant burden on the combined company's management and internal resources. Challenges of integration include the combined company's ability to incorporate acquired products and business technology into its existing product offerings, and its ability to sell the acquired products through Web.com's existing or acquired sales channels. Web.com may also experience difficulty in effectively integrating the different cultures and practices of the acquired company, as well as in assimilating its' broad and geographically dispersed personnel. Further, the difficulties of integrating the acquired company could disrupt the combined company's ongoing business, distract its management focus from other opportunities and challenges, and increase the combined company's expenses and working capital requirements. The diversion of management attention and any difficulties encountered in the transition and integration process could harm the combined company's business, financial condition and operating results.

We rely heavily on the reliability, security, and performance of our internally developed systems and operations, and any difficulties in maintaining these systems may result in service interruptions, decreased customer service, or increased expenditures.

The software and workflow processes that underlie our ability to deliver our web services and products have been developed primarily by our own employees. The reliability and continuous availability of these internal systems are critical to our business, and any interruptions that result in our inability to timely deliver our web services or products, or that materially impact the efficiency or cost with which we provide these web services and products, would harm our reputation, profitability, and ability to conduct business. In addition, many of the software systems we currently use will need to be enhanced over time or replaced with equivalent commercial products, either of which could entail considerable effort and expense. If we fail to develop and execute reliable policies, procedures, and tools to operate our infrastructure, we could face a substantial decrease in workflow efficiency and increased costs, as well as a decline in our revenue.

System and Internet failures could harm our reputation, cause our customers to request reimbursement for services paid for and not received or cause our customers to seek another provider for services.

We must be able to operate the systems that manage our network around the clock without interruption. Our operations depend upon our ability to protect our network infrastructure, equipment, and customer files against damage from human error, fire, earthquakes, hurricanes, floods, power loss, telecommunications failures, sabotage, intentional acts of vandalism and similar events. Our networks are currently subject to various points of failure. For example, a problem with one of our routers (devices that move information from one computer network to another) or switches could cause an interruption in the services that we provide to some or all of our customers. In the past, we have experienced periodic interruptions in service. We have also experienced, and in the future we may again experience, delays or interruptions in service as a result of the accidental or intentional actions of Internet users, current and former employees, or others. Any future interruptions could:

•

cause customers or end users to seek damages for losses incurred;

•

require us to replace existing equipment or add redundant facilities;

•

damage our reputation for reliable service;

•

cause existing customers to cancel their contracts; or

•

make it more difficult for us to attract new customers.

35

We have been adversely affected by information security breaches and cyber security attacks and could be adversely affected by breaches or attacks in the future.

Information security risks have generally increased in recent years, in part because of the proliferation of new technologies and the use of the Internet, and the increased sophistication and activities of organized crime, hackers, terrorists, activists, and other external parties, some of which may be linked to terrorist organizations or hostile foreign governments. Our web services involve the storage and transmission of our customers' and employees' proprietary information. Our business relies on our digital technologies, computer and email systems, software, and networks to conduct its operations. Our technologies, systems and networks may become the target of criminal cyberattacks or information security breaches that could result in the unauthorized release, gathering, monitoring, misuse, loss or destruction of confidential, proprietary and other information of Web.com or third parties with whom we deal, or otherwise disrupt our or our customers’ or other third parties’ business operations. It is critical to our business strategy that our facilities and infrastructure remain secure and are perceived by the marketplace to be secure. Although we employ appropriate security technologies (including data encryption processes, intrusion detection systems), and conduct comprehensive risk assessments and other internal control procedures to assure the security of our customers' data, we cannot guarantee that these measures will be sufficient for this purpose.

For example, on August 13, 2015, we were subject to an unauthorized breach of one of our computer systems. As a result of this attack, the credit card information of approximately 93,000 customers (of the company's over 3.3 million customers) may have been compromised. If our security measures are breached again as a result of third-party action, employee error or otherwise, and as a result our customers' data becomes available to unauthorized parties, we could incur liability and our reputation would be damaged, which could lead to the loss of current and potential customers. If we experience any breaches of our network security or sabotage, we might be required to expend significant capital and other resources to detect, remedy, protect against or alleviate these and related problems, and we may not be able to remedy these problems in a timely manner, or at all. Because techniques used by outsiders to obtain unauthorized network access or to sabotage systems change frequently and generally are not recognized until launched against a target, we may be unable to anticipate these techniques or implement adequate preventative measures. As cyber threats continue to evolve, we may be required to expend significant additional resources to continue to modify or enhance our protective measures or to investigate and remediate any information security vulnerabilities. Although we have insurance in place that covers such incidents, the cost of a breach or cyberattack could well exceed any such insurance coverage.

Our servers are also frequently subjected to denial of service attacks and other attempts to disrupt traffic to ours and our customers' websites. Although we have been able to minimize these disruptions in the past, there is no guarantee that we will be able to do so successfully in the future. Our customers and employees have been and will continue to be targeted by parties using fraudulent “spoof” and “phishing” emails to misappropriate personal information or to introduce viruses or other malware through “trojan horse” programs to our users' computers. These emails appear to be legitimate emails sent by us, but direct recipients to fake websites operated by the sender of the email or request that the recipient send a password or other confidential information through email or download malware. Despite our efforts to mitigate “spoof” and “phishing” emails through product improvements and user education, “spoof” and “phishing” activities remain a serious problem that may damage our brands, discourage use of our websites and services and increase our costs.

We could become involved in claims, lawsuits or investigations that may result in adverse outcomes.

We may become a target of government investigations, private claims, or lawsuits, involving but not limited to general business, patent, or employee matters, including consumer class actions challenging our business practices. Such proceedings may initially be viewed as immaterial but could prove to be material. Litigation is inherently unpredictable, and excessive verdicts do occur. Adverse outcomes could result in significant monetary damages, including indemnification payments, or injunctive relief that could adversely affect our ability to conduct our business. Given the inherent uncertainties in litigation, even when we are able to reasonably estimate the amount of possible loss or range of loss and therefore record an aggregate litigation accrual for probable and reasonably estimable loss contingencies, the accrual may change in the future due to new developments or changes in approach. In addition, such investigations, claims and lawsuits could involve significant expense or divert management's attention and resources from other matters.

If we cannot adapt to technological advances, our web services and products may become obsolete and our ability to compete would be impaired.

Changes in our industry occur very rapidly, including changes in the way the Internet operates or is used by small businesses and their customers. As a result, our web services and products could become obsolete quickly. The introduction of competing products employing new technologies and the evolution of new industry standards could render our existing products or services obsolete and unmarketable. To be successful, our web services and products must keep pace with technological developments and evolving industry standards, address the ever-changing and increasingly sophisticated needs of our customers, and achieve market acceptance. If we are unable to develop new web services or products, or enhancements to our

36

web services or products, on a timely and cost-effective basis, or if our new web services or products or enhancements do not achieve market acceptance, our business would be seriously harmed.

Mobile devices are increasingly being used to access the Internet, and our cloud-based and mobile support products may not operate or be as effective when accessed through these devices, which could harm our business.

We offer our products across several operating systems and through the Internet. Mobile devices, such as smartphones and tablets, are increasingly being used as the primary means for accessing the Internet and conducting e-commerce. We are dependent on the functionality of our products with third-party mobile devices and mobile operating systems, as well as web browsers that we do not control. Any changes in such devices, systems or web browsers that impact the functionality of our products or give preferential treatment to competitive products could adversely affect usage of our products. In addition, because a growing number of our customers access our products through mobile devices, we are dependent on the interoperability of our products with mobile devices and operating systems. Improving mobile functionality is integral to our long-term product development and growth strategy. In the event that our customers have difficulty accessing and using our products on mobile devices, our customer growth, business and operating results could be adversely affected.

Our failure to build and maintain brand awareness could compromise our ability to compete and to grow our business.

As a result of the highly competitive nature of our market, and the likelihood that we will face competition from new entrants, we believe our own brand name recognition and reputation are important. If we do not continue to build and maintain brand awareness, we could be placed at a competitive disadvantage to companies whose brands are more recognizable than ours.

Providing web services and products to small businesses designed to allow them to Internet-enable their businesses is a fragmented and changing market; if this market fails to grow, we will not be able to grow our business.

Our success depends on a significant number of small businesses outsourcing website design, hosting, and management as well as adopting other online business solutions. The market for our web services and products is relatively fragmented and constantly changing. Custom website development has been the predominant method of Internet enablement, and small businesses may be slow to adopt our template-based web services and products. Further, if small businesses determine that having an online presence is not giving their businesses any advantages, they would be less likely to purchase our web services and products. If the market for our web services and products fails to grow or grows more slowly than we currently anticipate, or if our web services and products fail to achieve widespread customer acceptance, our business would be seriously harmed.

A portion of our web services are sold on a month-to-month basis, and if our customers are unable or choose not to subscribe to our web services, our revenue may decrease.

A portion of our web service offerings are sold pursuant to month-to-month subscription agreements and our customers generally can cancel their subscriptions to our web services at any time with little or no penalty.

There are a variety of factors, which have in the past led, and may in the future lead, to a decline in our subscription renewal rates. These factors include the cessation of our customers' businesses, the overall economic environment in the United States and its impact on small businesses, the services and prices offered by us and our competitors, and the evolving use of the Internet by small businesses. If our renewal rates are low or decline for any reason, or if customers demand renewal terms less favorable to us, our revenue may decrease, which could adversely affect our financial performance.

We were profitable for the years ended December 31, 2016 and 2015 and the three and six months ended June 30, 2017, but we were not profitable for the years ended December 31,
2014, and 2013 and the three and six months ended June 30, 2016 and we may not be profitable in the future.

We were profitable for the years ended December 31, 2016 and 2015 and the three and six months ended June 30, 2017, but we were not profitable for the years ended December 31, 2014, and 2013 and the three and six months ended June 30, 2016 and we may not be profitable in the future. As of
June 30, 2017
, we had an accumulated deficit of approximately
$234.1 million
. We expect that our expenses relating to the sale and marketing of our web services, technology improvements and general and administrative functions, as well as the costs of operating and maintaining our technology infrastructure, will remain consistent as a percentage of revenue. Accordingly, we may need to maintain or increase our revenue levels to be able to continue to maintain profitability. We may not be able to reduce in a timely manner or maintain our expenses in response to any decrease in our revenue, and our failure to do so would adversely affect our operating results and our level of profitability.

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If Internet usage does not grow or if the Internet does not continue to be the standard for eCommerce, our business may suffer.

Our success depends upon the continued development and acceptance of the Internet as a widely used medium for eCommerce and communication. Rapid growth in the uses of, and interest in, the Internet is a relatively recent phenomenon and its continued growth cannot be assured. A number of factors could prevent continued growth, development and acceptance, including:

•

the unwillingness of companies and consumers to shift their purchasing from traditional vendors to online vendors;

•

the Internet infrastructure may not be able to support the demands placed on it, and its performance and reliability may decline as usage grows;

•

security and authentication issues may create concerns with respect to the transmission over the Internet of confidential information; and

•

privacy concerns, including those related to the ability of websites to gather user information without the user's knowledge or consent, may impact consumers' willingness to interact online.

Any of these issues could slow the growth of the Internet, which could limit our growth and revenues.

One of our business strategies is to acquire complementary services, technologies or businesses and we have a history of such acquisitions. Under applicable accounting, we allocate the total purchase price of a particular acquisition to an acquired company's net tangible assets and intangible assets based on their fair values as of the date of the acquisition, and record the excess of the purchase price over those fair values as goodwill. Our management's estimates of fair value are based upon assumptions believed to be reasonable but are inherently uncertain. Going forward, the following factors, among others, could result in material charges that would adversely affect our financial results:

•

impairment of goodwill and/or intangible assets;

•

charges for the amortization of identifiable intangible assets and for stock-based compensation;

•

accrual of newly identified pre-merger contingent liabilities that are identified subsequent to the finalization of the purchase price allocation; and

•

charges to eliminate certain of our pre-merger activities that duplicate those of the acquired company or to reduce our cost structure.

Additional costs may include costs of employee redeployment, relocation and retention, including salary increases or bonuses, accelerated amortization of deferred equity compensation and severance payments, reorganization or closure of facilities, taxes and termination of contracts that provide redundant or conflicting services. Some of these costs may have to be accounted for as expenses that would decrease our net income and earnings per share for the periods in which those adjustments are made.

In the future, we may be unable to generate sufficient cash flow to satisfy our debt service obligations.

As of
June 30, 2017
, we had
$404.7 million
of aggregate principal amount of our Term Loan and no amounts drawn on our Revolving Credit Facility (defined in Note 6,
Long-Term Debt
) and $258.8 million aggregate principal amount of 1.00% Senior Convertible Notes due August 15, 2018 ("2018 Notes") outstanding. Our ability to generate cash flow from operations to make principal and interest payments on our debt will depend on our future performance, including the operations of Yodle upon the consummation of that transaction, which will be affected by a range of economic, competitive and business factors. If our operations do not generate sufficient cash flow from operations to satisfy our debt service obligations, we may need to seek additional capital to make these payments or undertake alternative financing plans, such as refinancing or restructuring our debt, selling assets or reducing or delaying capital investments and acquisitions. We cannot assure you that such additional capital or alternative financing will be available on favorable terms, if at all. Our inability to generate sufficient cash flow from operations or obtain additional capital or alternative financing on acceptable terms could harm our business, financial condition and results of operations. We may also choose to use cash flow from operations to repurchase shares of our common stock which would otherwise be available to pay down long-term debt.

Weakened global economic conditions may harm our industry, business and results of operations.

Our overall performance depends in part on worldwide economic conditions, which may remain challenging for the foreseeable future. Global financial developments, such as the United Kingdom's decision to exit the European Monetary Union, may adversely impact the economy of the European Union, seemingly unrelated to us or our industry may harm us. The United

38

States and other key international economies have been impacted by falling demand for a variety of goods and services, poor credit, restricted liquidity, reduced corporate profitability, volatility in credit, equity and foreign exchange markets, bankruptcies, and overall uncertainty with respect to the economy. These conditions affect spending and could adversely affect our customers' ability or willingness to purchase our service, delay prospective customers' purchasing decisions, reduce the value or duration of their subscriptions, or affect renewal rates, all of which could harm our operating results.

Our existing and target customers are small businesses. These businesses may be more likely to be significantly affected by economic downturns than larger, more established businesses. For instance, a financial crisis affecting the banking system or financial markets or the possibility that financial institutions may consolidate or go out of business would result in a tightening in the credit markets, which could limit our customers' access to credit. Additionally, these customers often have limited discretionary funds, which they may choose to spend on items other than our web services and products. If small businesses experience economic hardship, or if they behave more conservatively in light of the general economic environment, they may be unwilling or unable to expend resources to develop their online presences, which would negatively affect the overall demand for our services and products and could cause our revenue to decline.

If we fail to comply with the established rules of credit card associations, we will face the prospect of financial penalties and could lose our ability to accept credit card payments from customers, which would adversely affect our business and financial condition.

A substantial majority of our revenue originates from online credit card transactions. Under credit card association rules, penalties may be imposed at the discretion of the association. Any such potential penalties would be imposed on our credit card processor by the association. Under our contract with our processor, we are required to reimburse our processor for such penalties. We face the risk that one or more credit card associations may, at any time, assess penalties against us or terminate our ability to accept credit card payments from customers, which would have a material adverse effect on our business, financial condition and results of operations.

Our data centers are maintained by third parties. A disruption in the ability of one of these service providers to provide service to us could cause a disruption in service to our customers.

A substantial portion of the network services and computer servers we utilize in the provision of services to customers are housed in data centers owned by other service providers. In particular, a significant number of our servers are housed in data centers in Atlanta, Georgia, Jacksonville, Florida and New York, New York. We obtain Internet connectivity for those servers, and for the customers who rely on those servers, in part through direct arrangements with network service providers and in part indirectly through the owners of those data centers. We also utilize other third-party data centers in other locations. In the future, we may house other servers and hardware items in facilities owned or operated by other service providers.

A disruption in the ability of one of these service providers to provide service to us could cause a disruption in service to our customers. A service provider could be disrupted in its operations through a number of contingencies, including unauthorized access, computer viruses, accidental or intentional actions, electrical disruptions, and other extreme conditions. Although we believe we have taken adequate steps to protect our business through contractual arrangements with our service providers, we cannot eliminate the risk of a disruption in service resulting from the accidental or intentional disruption in service by a service provider. Any significant disruption could cause significant harm to us, including a significant loss of customers. In addition, a service provider could raise its prices or otherwise change its terms and conditions in a way that adversely affects our ability to support our customers or could result in a decrease in our financial performance.

We face intense and growing competition. If we are unable to compete successfully, our business will be seriously harmed.

The market for our web services and products is highly competitive and is characterized by relatively low barriers to entry. Our competitors vary in terms of their size and what services they offer. We encounter competition from a wide variety of company types, including:

•

website design and development service and software companies;

•

Internet service providers and application service providers;

•

Internet search engine providers;

•

local business directory providers;

•

website domain name providers and hosting companies; and

•

eCommerce platform and service providers.

39

In addition, due to relatively low barriers to entry in our industry, we expect the intensity of competition to increase in the future from both established and emerging companies. Increased competition may result in reduced gross margins, the loss of market share, or other changes which could seriously harm our business. We also expect that competition will increase as a result of industry consolidations and formations of alliances among industry participants.

Many of our current and potential competitors have longer operating histories, significantly greater financial, technical, marketing and other resources, greater brand recognition and, we believe, a larger installed base of customers. These competitors may be able to adapt more quickly to new or emerging technologies and changes in customer requirements. They may also be able to devote greater resources to the promotion and sale of their services and products than we can. If we fail to compete successfully against current or future competitors, our revenue could increase less than anticipated or decline and our business could be harmed.

We might require additional capital to support our growth, and this capital might not be available on acceptable terms or at all.

We intend to continue to make investments to support our business growth and may require additional funds to respond to business challenges, including the need to develop new services and products, enhance our existing web services, or our operating infrastructure and acquire complementary businesses and technologies. Accordingly, we may need to engage in equity or debt financings to secure additional funds.

In the event of another global financial crisis, such as the one experienced in 2008, which included, among other things, significant reductions in available capital from banks and other providers of credit and substantial reductions or fluctuations in equity and currency values worldwide, may make it difficult for us to obtain additional financing on terms favorable to us, if at all. If we raise additional funds through further issuances of equity or convertible debt securities, our existing stockholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges superior to those of our common stock. Any debt financing secured by us in the future could involve restrictive covenants relating to our capital raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. If we are unable to obtain adequate financing or financing on terms satisfactory to us, when we require it, our ability to continue to support our business growth and to respond to business challenges could be significantly impaired.

We are subject to export control and economic sanctions laws that could impair our ability to compete in international markets and subject us to liability if we are not in full compliance with applicable laws.

Our business activities are subject to various restrictions under U.S. export controls and trade and economic sanctions laws, including the U.S. Commerce Department's Export Administration Regulations and economic and trade sanctions regulations maintained by the U.S. Treasury Department's Office of Foreign Assets Control, or OFAC. If we fail to comply with these laws and regulations, we could be subject to civil or criminal penalties and reputational harm. U.S. export control laws and economic sanctions laws also prohibit certain transactions with U.S. embargoed or sanctioned countries, governments, persons and entities.

Our business depends in part on our ability to continue to provide value-added web services and products, many of which we provide through agreements with third parties. Our business will be harmed if we are unable to provide these web services and products in a cost-effective manner.

A key element of our strategy is to combine a variety of functionalities in our web service offerings to provide our customers with comprehensive online solutions, such as Internet search optimization, local yellow pages listings, and eCommerce capabilities. We provide many of these services through arrangements with third parties, and our continued ability to obtain and provide these services at a low cost is central to the success of our business. For example, we currently have agreements with several service providers that enable us to provide, at a low cost, Internet yellow pages advertising. However, these agreements may be terminated on short notice, typically 30 to 90 days, without penalty. If any of these third parties were to terminate their relationships with us, or to modify the economic terms of these arrangements, we could lose our ability to provide these services at a cost-effective price to our customers, which could cause our revenue to decline or our costs to increase.

The Company's ability to use its net operating loss carry forwards ("NOLs") to offset future taxable income may be limited if taxable income does not reach sufficient levels, or as a result of a change in control which could limit available NOLs.

As of December 31, 2016, the Company had U.S. Federal NOLs of approximately $290.5 million, which includes $72 million from Yodle pre-acquisition periods, available to offset future taxable income and expire between 2020 and 2035. In connection

40

with the Company’s adoption of ASU 2016-09 in the first quarter of 2017, these NOLs include $77.1 million related to excess tax benefits for stock-based compensation deductions. See Note 1 for additional information. These NOLs are subject to various limitations under Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”). Accordingly, the Company estimates that at least $236.9 million of these NOLs will be available during the carry forward period based on our existing Section 382 limitations.

If the Company experiences any future “ownership change” as defined in Section 382 of the Code, the Company's ability to utilize its U.S. Federal NOLs could be further limited. Similar results could apply to our U.S. state NOLs because the states in which we operate generally follow Section 382.

As of December 31, 2016, the Company also had $51.5 million of NOLs in the United Kingdom ("UK") related to Scoot, of which the substantial portion was incurred in pre-acquisition periods. Although not subject to expiration, pre-acquisition NOLs could be eliminated under certain circumstances, as determined under applicable tax laws in the United Kingdom, in the 3 year periods both before and after the acquisition date. Although the Company does not believe the pre-acquisition NOLs are subject to any such limitations to date, future activities could subject these NOLs to limitation. As of December 31, 2016, the Company's valuation allowance includes $50.4 million of these NOLs as it is not more likely than not that this portion of the NOLs will be realized based on the expected reversals of existing deferred tax liabilities. The net tax values related to UK NOLs and related valuation allowance decreased as a result of changes in foreign exchange and tax rates during the year.

The Company's ability to use its NOLs will also depend on the amount of taxable income generated in future periods. The U.S. NOLs may expire before the Company can generate sufficient taxable income to utilize the NOLs.

The accounting method for convertible debt securities that may be settled in cash, such as the 2018 Notes, could have a material effect on our reported financial results.

Under ASC 470-20, an entity must separately account for the liability and equity components of the convertible debt instruments (such as the 2018 Notes) that may be settled entirely or partially in cash upon conversion in a manner that reflects the issuer's economic interest cost. The effect of ASC 470-20 on the accounting for the 2018 Notes is that the equity component is required to be included in the additional paid-in-capital section of stockholders' equity on our consolidated balance sheet, and the value of the equity component would be treated as original issue discount for purposes of accounting for the debt component of the 2018 Notes. As a result, we will be required to record a greater amount of non-cash interest expense from the amortization of the discounted carrying value of the 2018 Notes to their face amount over the term of the 2018 Notes. We will also report lower net income or increased net loss in our financial results, the trading price of our common, and the trading price of the 2018 Notes.

In addition, under certain circumstances, convertible debt instruments (such as the 2018 Notes) that may be settled entirely or partly in cash may be accounted for utilizing the treasury stock method, the effect of which is that the shares that would be issuable upon conversion of the 2018 Notes are not included in the calculation of diluted earnings per share except to the extent the conversion value of the 2018 Notes exceeds their principal amount. Under the treasury stock method, for diluted earnings per share purposes, the transaction is accounted for as if the number of shares of common stock that would be necessary to settle such excess, if we elected to settle such excess in shares, are issued. We cannot be sure that the accounting standards in the future will continue to permit our use the treasury stock method. If we are unable to use the treasury stock method in accounting for the shares issuable upon conversion of the 2018 Notes, then our diluted earnings per share may be adversely affected.

Any growth could strain our resources and our business may suffer if we fail to implement appropriate controls and procedures to manage our growth.

Growth in our business may place a strain on our management, administrative, and sales and marketing infrastructure. If we fail to successfully manage our growth, our business could be disrupted, and our ability to operate our business profitably could suffer. Growth in our employee base may be required to expand our customer base and to continue to develop and enhance our web service and product offerings. To manage growth of our operations and personnel, we will need to enhance our operational, financial, and management controls and our reporting systems and procedures. This will require additional personnel and capital investments, which will increase our cost base. The growth in our fixed cost base may make it more difficult for us to reduce expenses in the short term to offset any shortfalls in revenue.

If we fail to maintain an effective system of internal controls, we may not be able to accurately or timely report our financial results, which could cause our stock price to fall or result in our stock being delisted.

Effective internal controls are necessary for us to provide reliable and accurate financial reports. We will need to devote significant resources and time to comply with the requirements of Sarbanes-Oxley with respect to internal control over

41

financial reporting. In addition, Section 404 under Sarbanes-Oxley requires that we assess and our auditors attest to the design and operating effectiveness of our internal control over financial reporting. Our ability to comply with the annual internal control report requirement in future years will depend on the effectiveness of our financial reporting and data systems and controls across our company and our operating subsidiaries. We expect these systems and controls to become increasingly complex as we integrate acquisitions and our business grows. To effectively manage this complexity, we will need to continue to improve our operational, financial, and management controls and our reporting systems and procedures. Any failure to implement required new or improved controls, or difficulties encountered in the implementation or operation of these controls, could harm our operating results or cause us to fail to meet our financial reporting obligations, which could adversely affect our business and jeopardize our listing on the NASDAQ Global Select Market, either of which would harm our stock price.

We dependent on our executive officers, and the loss of any key personnel may compromise our ability to successfully manage our business and pursue our growth strategy.

Our future performance depends largely on the continuing service of our executive officers and senior management team, especially that of David Brown, our Chief Executive Officer. Our executives are not contractually obligated to remain employed by us. Accordingly, any of our key employees could terminate their employment with us at any time without penalty and may go to work for one or more of our competitors after the expiration of their non-compete period. The loss of one or more of our executive officers could make it more difficult for us to pursue our business goals and could seriously harm our business.

Our growth will be adversely affected if we cannot continue to successfully retain, hire, train, and manage our key employees, particularly in the telesales and customer service areas.

Our ability to successfully pursue our growth strategy will depend on our ability to attract, retain, and motivate key employees across our business. We have many key employees throughout our organization that do not have non-competition agreements and may leave to work for a competitor at any time. In particular, we are substantially dependent on our telesales and customer service employees to obtain and service new customers. Competition for such personnel and others can be intense, and there can be no assurance that we will be able to attract, integrate, or retain additional highly qualified personnel in the future. In addition, our ability to achieve significant growth in revenue will depend, in large part, on our success in effectively training sufficient personnel in these two areas. New hires require significant training and in some cases may take several months before they achieve full productivity, if they ever do. Our recent hires and planned hires may not become as productive as we would like, and we may be unable to hire sufficient numbers of qualified individuals in the future in the markets where we have our facilities. If we are not successful in retaining our existing employees, or hiring, training and integrating new employees, or if our current or future employees perform poorly, growth in the sales of our services and products may not materialize and our business will suffer.

Increases in payment processing fees, changes to operating rules, the acceptance of new types of payment methods or payment fraud could increase our operating expenses and adversely affect our business and results of operations.

Our customers pay for our services predominately using credit and debit cards (together, "payment cards"). Our acceptance of these payment cards requires our payment of certain fees. From time to time, these fees may increase, either as a result of rate changes by the payment processing companies or as a result of a change in our business practices which increase the fees on a cost-per-transaction basis. Such increases may adversely affect our results of operations.

As our services continue to evolve and expand internationally, we will likely explore accepting various forms of payment, which may have higher fees and costs than our currently accepted payment methods. In addition, if more of our customers utilize higher cost payment methods, our payment costs could increase and our results of operations could be adversely impacted.

Furthermore, we do not obtain signatures from customers in connection with their use of payment methods. To the extent we do not obtain customer signatures, we may be liable for fraudulent payment transactions, even when the associated financial institution approves payment of the orders.

From time to time, fraudulent payment methods are used to obtain service. While we do have certain safeguards in place, we nonetheless experience some fraudulent transactions. The costs to us of these fraudulent transaction includes the costs of implementing as well as updating our safeguards. These fraudulent accounts also increase our bad debt expense and complicate our forecasting efforts as they result in almost 100% customer loss when they are discovered. We do not currently carry insurance against the risk of fraudulent payment transactions. A failure to adequately control fraudulent payment transactions may harm our business and results of operations.

42

Our business could be affected by new governmental regulations regarding the Internet.

To date, government regulations have not materially restricted the use of the Internet in most parts of the world. The legal and regulatory environment pertaining to the Internet, however, is uncertain and may change. New laws may be passed, existing but previously inapplicable or unenforced laws may be deemed to apply to the Internet or regulatory agencies may begin to rigorously enforce such formerly unenforced laws, or existing legal safe harbors may be narrowed, both by U.S. federal or state governments and by governments of foreign jurisdictions. These changes could affect:

•

the liability of online resellers for actions by customers, including fraud, illegal content, spam, phishing, libel and defamation, infringement of third-party intellectual property and other abusive conduct;

•

other claims based on the nature and content of Internet materials;

•

user privacy and security issues;

•

consumer protection;

•

sales taxes by the states in which we sell certain of our products and other taxes, including the value-added tax of the European Union member states, which could impact how we conduct our business by requiring us to set up processes to collect and remit such taxes and could increase our sales audit risk;

•

characteristics and quality of services; and

•

cross-border eCommerce.

The adoption of any new laws or regulations, or the application or interpretation of existing laws or regulations to the Internet, could hinder growth in use of the Internet and online services generally, and decrease acceptance of the Internet and online services as a means of communication, ecommerce and advertising. In addition, such changes in laws could increase our costs of doing business, subject our business to increased liability or prevent us from delivering our services over the Internet, thereby harming our business and results of operations.

Changes in legislation or governmental regulations, policies or standards applicable to our product offerings may have a significant impact on our ability to compete in our target markets.

The telecommunications industry is regulated by the Federal Communications Commission ('FCC") in the U.S. While most such regulations do not affect us directly, certain of those regulations may affect our product offerings. For example, effective October 16, 2013, FCC rules were adopted to require companies to obtain prior express written consent from consumers before calling them with prerecorded telemarketing "robocalls" or before using an autodialer to call their wireless numbers with telemarketing messages unless an unambiguous written consent is obtained before the telemarketing call or text message. If we are unable to satisfy such FCC rules, we could be prevented from providing such product offering to our customers, which could materially and adversely affect our future revenues.

Our business could be materially harmed if the administration and operation of the Internet no longer rely upon the existing domain system.

The domain registration industry continues to develop and adapt to changing technology. This development may include changes in the administration or operation of the Internet, including the creation and institution of alternate systems for directing Internet traffic without the use of the existing domain system. The widespread acceptance of any alternative systems could eliminate the need to register a domain to establish an online presence and could materially adversely affect our business, financial condition and results of operations.

Activities of customers or the content of their websites could damage our reputation and brand or harm our business and financial results.

As a provider of domain name registration and hosting products and services, we may be subject to potential liability for the activities of our customers in connection with their use (including their misuse) of our offerings. Although our agreements with our customers prohibit unauthorized use of our products and services and permit us to take appropriate actions for such use, customers may nonetheless engage in prohibited activities, which could subject us to liability. Our reputation and brand may also be negatively impacted by the actions of customers. We do not proactively monitor or review the appropriateness of customers’ use of our products or services, and we do not have control over customer activities. While we have safeguards in place, these mechanisms may not be sufficient to avoid harm to our reputation and brand.

Certain federal statutes may apply to us with respect to various activities of our customers, including: the Digital Millennium Copyright Act of 1998 (“DMCA”); the Communications Decency Act of 1996 (“CDA”); and the Anticybersquatting Consumer

43

Protection Act (“ACPA”). The DMCA and the CDA generally protect online service providers like us from liability for certain activities of their customers. For example, the safe harbor provisions of the DMCA shield Internet service providers and other intermediaries from direct or indirect liability for copyright infringement. Under the CDA, we are generally not responsible for the customer-created content hosted on our servers and thus are generally immunized from liability for torts committed by others. Under the safe harbor provisions of the ACPA, domain name registrars are shielded from liability in many circumstances.

Changes to these laws and/or court rulings in pending or future litigation may narrow the scope of protection afforded us. Regardless of these protections, the activities of our customers may result in threatened or actual litigation against us. If such claims are successful, our business and operating results could be adversely affected, and even if the claims do not result in litigation or are resolved in our favor, these claims, and the time and resources necessary to resolve them, could divert the resources of our management and adversely affect our business and operating results.

We may be unable to protect our intellectual property adequately or cost-effectively, which may cause us to lose market share or otherwise harm our competitive position.

Our success depends, in part, on our ability to protect and preserve the proprietary aspects of our technology, web services, and products. If we are unable to protect our intellectual property, our competitors could use our intellectual property to market services and products similar to those offered by us, which could decrease demand for our web services and products. We may be unable to prevent third parties from using our proprietary assets without our authorization. We do not currently rely on patents to protect all of our core intellectual property. To protect, control access to, and limit distribution of our intellectual property, we generally enter into confidentiality and proprietary inventions agreements with our employees, and confidentiality or license agreements with consultants, third-party developers, and customers. We also rely on copyright, trademark, and trade secret protection. However, these measures afford only limited protection and may be inadequate. Enforcing our rights to our technology could be costly, time-consuming and distracting. Additionally, others may develop non-infringing technologies that are similar or superior to ours. Any significant failure or inability to adequately protect our proprietary assets will harm our business and reduce our ability to compete.

Impairment of goodwill and other intangible assets would result in a decrease in earnings.

Current accounting rules require that goodwill and other intangible assets with indefinite useful lives may not be amortized, but instead must be tested for impairment at least annually. These rules also require that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. We have substantial goodwill and other intangible assets, and we would be required to record a significant charge to earnings in our financial statements during the period in which any impairment of our goodwill or intangible assets is determined. Any impairment charges or changes to the estimated amortization periods could have a material adverse effect on our financial results.

Provisions in our amended and restated certificate of incorporation and bylaws or under Delaware law might discourage, delay, or prevent a change of control of our company or changes in our management and, therefore, depress the trading price of our common stock.

Our amended and restated certificate of incorporation and bylaws contain provisions that could depress the trading price of our common stock by acting to discourage, delay, or prevent a change of control of our company or changes in our management that the stockholders of our company may deem advantageous. These provisions:

•

establish a classified board of directors so that not all members of our board are elected at one time;

•

provide that directors may only be removed for cause and only with the approval of 66 2/3% of our stockholders;

•

require super-majority voting to amend some provisions in our amended and restated certificate of incorporation and bylaws;

•

authorize the issuance of blank check preferred stock that our board of directors could issue to increase the number of outstanding shares to discourage a takeover attempt;

•

prohibit stockholder action by written consent, which requires all stockholder actions to be taken at a meeting of our stockholders;

•

provide that the board of directors is expressly authorized to make, alter, or repeal our bylaws; and

44

•

establish advance notice requirements for nominations for elections to our board or for proposing matters that can be acted upon by stockholders at stockholder meetings.

Additionally, we are subject to Section 203 of the Delaware General Corporation Law, which generally prohibits a Delaware corporation from engaging in any of a broad range of business combinations with any “interested” stockholder for a period of three years following the date on which the stockholder became an “interested” stockholder and which may discourage, delay, or prevent a change of control of our company.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

Issuer Repurchases of Equity Securities

Our stock repurchase program announced on November 5, 2014, initially authorized the repurchase of up to $100 million of our outstanding shares of common stock from time to time. In October 2016, our Board of Directors approved an increase in our current stock repurchase plan by an additional $100 million and extended the expiration date of the outstanding available shares to December 31, 2018. As of June 30, 2017, the value of common shares repurchased under this program was $92.0 million. The remaining dollar value of shares that may yet be purchased under the publicly announced repurchased program was approximately $108.0 million as of June 30, 2017.
No common shares were repurchased during the three months ended June 30, 2017.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

None.

Item 6. Exhibits.

Exhibit No.

Description of Document

2.4

Agreement and Plan of Merger dated February 11, 2016 by an among the Company, Barton Creek, Web.com LLC and Yodle, Inc. (1)

Indenture dated August 14, 2013 between the Company and Wells Fargo Bank, National Association, as Trustee. (5)

4.4

First Supplemental Indenture, dated August 14, 2013, between the Company and Wells Fargo Bank, National Association, as Trustee (including the form of 1.00% Senior Convertible Notes due 2018). (6)

10.1

Amendment to Credit Agreement, dated as of February 11, 2016, by and among the Company, the guarantor's party thereto, JPMorgan Chase Bank, N.A., as administrative agent and the lender's party thereto. (7)

10.2

Amendment to Credit Agreement, dated as of May 18, 2017, by and among the Company, the guarantor's party thereto, JPMorgan Chase Bank, N.A., as administrative agent and the lender's party thereto.

Certifications of Chief Executive Officer and Chief Financial Officer required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. §1350). (8)

EX-101.INS

XBRL Instance Document.*

EX-101.SCH

XBRL Taxonomy Extension Schema Document.*

EX-101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document.*

EX-101.DEF

XBRL Taxonomy Extension Definition Linkbase Document.*

EX-101.LAB

XBRL Taxonomy Extension Label Linkbase Document.*

EX-101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document.*

* The XBRL information is being furnished with this Form 10-Q, not filed

________________________

(1)

Filed as an Exhibit to the Registrant's current report on Form 8-K (000-51595), filed with the SEC on February 16, 2016, and incorporated herein by reference.

(2)

Filed as an Exhibit to the Registrant’s registration statement on Form S-1 (No. 333-124349), filed with the SEC on April 27, 2005, as amended, and incorporated herein by reference.

(3)

Filed as an Exhibit to the Registrant’s current report on Form 8-K (000-51595), filed with the SEC on February 10, 2009, and incorporated herein by reference.

(4)

Filed as an Exhibit to the Registrant’s current report on Form 8-K (000-51595), filed with the SEC on October 30, 2008, and incorporated herein by reference.

(5)

Filed as an Exhibit to the Registrant's current report on Form 8-K (000-51595), filed with the SEC on August 14, 2013, and incorporated herein by reference.

(6)

Filed as an Exhibit to the Registrant's current report on Form 8-K (000-51595), filed with the SEC on August 14, 2013, and incorporated herein by reference.

(7)

Filed as an Exhibit to the Registrant's current report on Form 8-K (000-51595), filed with the SEC on February 16, 2016, and incorporated herein by reference.

(8)

The certification attached as Exhibit 32.1 accompanying this Quarterly Report on Form 10-Q, is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of Web.com Group, Inc. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Quarterly Report on Form 10-Q, irrespective of any general incorporation language contained in such filing.

46

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Web.com Group, Inc.

(Registrant)

August 4, 2017

/s/ Kevin M. Carney

Date

Kevin M. Carney

Chief Financial Officer

(Principal Financial and Accounting Officer)

47

INDEX OF EXHIBITS

Exhibit No.

Description of Document

2.4

Agreement and Plan of Merger dated February 11, 2016 by an among the Company, Barton Creek, Web.com LLC and Yodle, Inc. (1)

Indenture dated August 14, 2013 between the Company and Wells Fargo Bank, National Association, as Trustee. (5)

4.4

First Supplemental Indenture, dated August 14, 2013, between the Company and Wells Fargo Bank, National Association, as Trustee (including the form of 1.00% Senior Convertible Notes due 2018). (6)

10.1

Amendment to Credit Agreement, dated as of February 11, 2016, by and among the Company, the guarantor's party thereto, JPMorgan Chase Bank, N.A., as administrative agent and the lender's party thereto. (7)

10.2

Amendment to Credit Agreement, dated as of May 18, 2017, by and among the Company, the guarantor's party thereto, JPMorgan Chase Bank, N.A., as administrative agent and the lender's party thereto.

Certifications of Chief Executive Officer and Chief Financial Officer required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. §1350). (8)

EX-101.INS

XBRL Instance Document.*

EX-101.SCH

XBRL Taxonomy Extension Schema Document.*

EX-101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document.*

EX-101.DEF

XBRL Taxonomy Extension Definition Linkbase Document.*

EX-101.LAB

XBRL Taxonomy Extension Label Linkbase Document.*

EX-101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document.*

(1)

Filed as an Exhibit to the Registrant's current report on Form 8-K (000-51595), filed with the SEC on February 16, 2016, and incorporated herein by reference.

(2)

Filed as an Exhibit to the Registrant’s registration statement on Form S-1 (No. 333-124349), filed with the SEC on April 27, 2005, as amended, and incorporated herein by reference.

(3)

Filed as an Exhibit to the Registrant’s current report on Form 8-K (000-51595), filed with the SEC on February 10, 2009, and incorporated herein by reference.

(4)

Filed as an Exhibit to the Registrant’s current report on Form 8-K (000-51595), filed with the SEC on October 30, 2008, and incorporated herein by reference.

48

(5)

Filed as an Exhibit to the Registrant's current report on Form 8-K (000-51595), filed with the SEC on August 14, 2013, and incorporated herein by reference.

(6)

Filed as an Exhibit to the Registrant's current report on Form 8-K (000-51595), filed with the SEC on August 14, 2013, and incorporated herein by reference.

(7)

Filed as an Exhibit to the Registrant's current report on Form 8-K (000-51595), filed with the SEC on February 16, 2016, and incorporated herein by reference.

(8)

The certification attached as Exhibit 32.1 accompanying this Quarterly Report on Form 10-Q, is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of Web.com Group, Inc. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Quarterly Report on Form 10-Q, irrespective of any general incorporation language contained in such filing.

* The XBRL information is being furnished with this Form 10-Q, not filed.